Barrons
The companies on our list have a long and steady history of increasing their cash payouts to shareholders.
LAST YEAR, MANY LARGE U.S. companies had to cut or eliminate their dividends. And in 2009, the dividend news is likely to grow worse.
But income-hungry investors who prize dividend payments can still generate reliable returns from the elite among the Standard & Poor's 500 index's dividend-paying stocks.
To come up with a handful of dividend-paying stocks that we think won't let investors down, Barron's Online started with Standard & Poor's S&P 500 Dividend Aristocrats.
The 52 companies on the latest list, which came out in December, have all boosted their dividend payouts to investors for at least 25 consecutive years regardless of market conditions.
The next step was winnowing down the number of stock candidates. First we eliminated companies that aren't expected to generate profit growth in 2009. We also nixed companies with debt-to-capital ratios above 50% as well as companies that were paying out more than half of their annual earnings in dividends.
(A company with too high a dividend-payout ratio has less of an ability to protect its dividend in the event of an earnings downturn.)
We then looked for stocks with growing dividends, and yields above the 1.6% paid by 10-year inflation-protected Treasuries.
Among the stocks left standing were
McDonald's (ticker: MCD),
Procter & Gamble (PG),
Wal-Mart Stores (WMT),
Becton Dickinson (BDX) and
Aflac (AFL).
These companies have some of the fastest-growing profits and dividends among large-cap stocks.
"In this environment, anyone raising their dividend stands out," says Richard Helm, a manager of the Cohen & Steers Dividend Value Fund. "What better way to show confidence in your business."
Confidence, however, has been waning, and for good reasons.
In 2008, dividend payments by companies in the S&P 500 rose by a mere 2.4%, the worse performance since 2001, when the dividends payout fell 3.3%.
And in 2009, dividends could fall even more than that as the economic recession deepens.
Investment pros suggest avoiding some classic high-yield stocks (see Weekday Trader, "
In Dividends We Trust," Sept. 16, 2008).
Falling stock prices will create handsome yields that offer little comfort if the stock price keeps falling or if financial problems force the company to cut its dividend.
Last year, 48 members of the S&P 500 -- including
American International Group (AIG),
Whole Foods Market (WFMI),
Citigroup (C) and the now bankrupt Lehman Bros. -- cut or suspended their dividends, sucking $40.6 billion from investors' pockets, according to Howard Silverblatt, senior index analyst with S&P.
Most of those announcements came from financial firms.
But the pain is spreading beyond financial firms.
To avoid getting blindsided, investors have to "check under the hood," says Judith Saryan, a portfolio manager with Eaton Vance Managed Investments.
Focus on companies with rising profits and enough free cash flow to fund the dividend payment.
Among our recommended five companies, the biggest one was Wal-Mart. While it has a modest yield of 1.8%, it has raised its dividend an average of 18% annually over the last five years.
In a down year for stocks, Wal-Mart shares gained almost 18% in 2008 as Americans flocked to discount stores. Meanwhile, fewer new-store openings and capital-spending cuts have strengthened free cash flow.
The dividend could climb 8% during the next fiscal year, which begins on Feb. 2.
Other company picks are increasing their dividends even faster.
With a yield of 3.4%, fast-food giant McDonald's could increase its payout to investors by almost 27% in 2009 to $2.12 a share.
Six years into a rebound spawned by new foods and less aggressive expansion, the company's popular "Dollar Menu" has lured cash-strapped diners.
Meanwhile, the timing of their last quarterly dividend hike -- a 33% increase on Sept. 25 -- denotes considerable confidence, says Chris Hagedorn, a portfolio manager with the Fifth Third Dividend Growth Fund.
The same can be said for medical-supply company Becton Dickinson, and life insurer Aflac. Both companies raised dividends last quarter.
"If raising the dividend is normally a strong sign of management's faith in the future, then in this environment it's even more so," Hagedorn adds.
Becton's profits are expected to climb an average of 12% annually over the next five years (see Weekday Trader, "
Becton Dickinson Is a Safe Bet," July 18, 2008). And during the fiscal year scheduled to end on Sept. 30, 2009, the annual payout could climb 14% to $1.31 a share.
Aflac, meanwhile, has raised its dividend an average of 27% annually over the last five years (see Barron's, "
Ducky Doings at Aflac," Feb. 4, 2008).
With a yield of 2.8%, the company's payout still consumes only one-quarter of profits, which are expected to climb 15% annually over the next five years, according to Thomson Reuters.
Other names, however, have had a harder time, recently.
At consumer-products titan Procter & Gamble, earnings estimates have come into doubt. Last month, the company -- which has raised its dividend for 52 consecutive years (see Barron's, "
Procter & Gamble Pampers Investors," April 14, 2008) -- warned that organic sales growth fell short during the quarter that ended on Dec. 31.
P&G still expects to earn between $4.28 a share and $4.38 a share during the fiscal year scheduled to end on June 30, a 17.6% to 20% gain.
Wall Street expects the dividend to climb 12%.
Of course, just because a company has a long history of increasing dividends does not mean that payments will keep rising, or survive.
If the recession deepens, then all bets may be off. For now, corporate boards may delay dividend hikes until they have a clearer picture of policies coming out of Washington.
Yet after 25 years or more, old habits die hard.
So investors should still be able to bank on dividends from the few companies that haven't let us down a year into a recession.
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