Drip Portfolio Dividends Defy Gravity

Like a low tide leaving interesting shellwork exposed, the emergence of rock-bottom interest rates draws attention to high-yielding stocks. While high-payout ratios are often eyesores in the growth landscape, they're a thing of beauty in these flat times. Dividends -- they're not just for stalwarts anymore.

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By Rick Aristotle Munarriz (TMF Edible)
August 8, 2002

If your portfolio is ripe with dividend reinvestment plans, odds are you're not smarting as much as your fellow investor. It's OK. You can admit it. You chose the more familiar girl next door over the fleetingly unfamiliar yet surprisingly mesmerizing supermodel growth stock, and you're not bleeding as badly as the masses. Well done.

Granted, you probably bought into the Drip mindset for a lot of reasons. Maybe you didn't have a lot of green to throw at the market to buy in round lots early on. Maybe you were drawn by the convenience of the reinvesting process or the promise of patient accumulation. Those are all worthy reasons to live the Drip way. But no matter what won you over, odds are you glossed over the notion that high-yielding stocks can serve as security blankets during times of market strife. It seems like a wallop of a bennie right now, though, doesn't it?

Case in point. Last Friday, when Disney (NYSE: DIS) warned of weakness at its theme parks, the tremor was felt throughout the entire amusement park industry. Debt-laden yet coaster-rich Six Flags (NYSE: PKS) shed 15% of its value that day. Meanwhile, fellow master of the midway Cedar Fair (NYSE: FUN) saw its shares dip a scant 3.5%.

Disparity: Is it the latest spin-and-puke ride? Not really. While Cedar Fair has been keeping its investors up to date on steady park attendance every month, the company also sports one of the juiciest yields outside the utility and real estate investment trust (REIT) sectors.

Cedar Fair's 7.5% yield has been more than just a quick way for investors in the company's Drip to build a position in the company. It has served as a worthy airbag in this violent market crash. Sure enough, the stock traded as low as $17.80 and as high as $25 over the past three years. That's one of the tightest trading ranges you'll find, given the volatility Wall Street experienced in that time.

The market may have peaked two years ago when Cedar Fair unleashed the country's largest roller coaster, but life has continued going up the lift hill for the company, despite the fact that the rest of the market took the steep Millennium Force plunge. The conservative park operator's stock is trading higher than it was back then, and I'm not even adding back the meaty quarterly payouts.

Earlier this week, Matt Richey took you through the field of high-yielding S&P 500 stocks to uncover some gems worth mining. He finally settled on Alltel (NYSE: AT), which, it's worth pointing out, offers a Drip.

Dividends aren't everything. Companies such as Xerox (NYSE: XRX) and Polaroid kept making high-dividend promises that their fundamentals couldn't keep. The payouts were eventually suspended. So let's make the distinction clear: High-yielding stocks with sound financial footing are the solid ground worth clinging to.

A dividend is not an elixir to cure implosions. However, it's worth noting that the worst of the bear market's carnage has taken place on Nasdaq's doorstep. Just a fifth of the Nasdaq-listed companies cut dividend checks, while nearly two-thirds of the New York Stock Exchange companies do.

But how and why are high-yielding stocks pulling off these gravity-defying tricks? It's simple, really. When one considers the diving return rates on other fixed income investments, the only way to drive yields lower on companies with steady, if not growing, payouts is for the share prices to appreciate. Nice. But that hasn't exactly happened because equity skepticism has kept stock buying in check. In other words, it's been a tug-of-war between falling interest rates (which would drive the share prices of dividend-paying companies higher) and fading investor interest in stocks (which would drive share prices lower). It may appear to be a draw -- a zero-sum game -- but do that while building up your quarterly payouts and get back to me on who's the real zero in today's market.

Big dividends might not amount to much in a bull market. When the going is good, you won't find a lot of people applauding companies that play hot potato with their influx of cash, heaving it toward shareholders' coffers. Reinvesting that capital into the company might make more sense. But in uncertain times like these, the sandbags are a welcome sight.

That's why the support has been building, despite the equity stagnancy of many dividend producers. Companies such as Philip Morris (NYSE: MO) and Verizon (NYSE: VZ) now yield at least three times more than your average money market fund. If the company's prospects aren't melting away and interest rates remain relatively low, how low do you think the robust yielders will go? If cash-rich companies such as Apple (Nasdaq: AAPL) and Microsoft (Nasdaq: MSFT) suddenly roll out 8% cash dividends, good only during the market lull, how much lower do you think the stocks could go before the yield chasers buy in?

But don't take my word for it. Let's go shopping. While retailers have been hit-or-miss of late, mall operators such as Mills (NYSE: MLS) and Simon (NYSE: SPG) are tickling 52-week highs. Why? Because they're structured as REITs, paying out most of the funds generated from operations as quarterly dividends. You might as well call these companies Mills Money Market Fund and Simon Property Prime Money Market Fund. Of course, they aren't assured of hugging the $1-a-share price of the typical money market fund, but the charts will show that hasn't been a bad thing, in these particular cases.

Maybe you're sold on locking into a 30-year Treasury bond and skimming off the 5.2% in annual interest income. Me? I'm more intrigued by the possibility of Kodak (NYSE: EK) bouncing back, waiting in the cozy armchair of its hefty 6.2% payout. There's yield out there in theme-ride Equity Hills. What's your Kodak moment?

P.S. In the free cash flow spreadsheet we offered last week, we said Mellon's (NYSE: MEL) book value has averaged 4.0 the last five years. That's meant to say Mellon's price-to-book value ratio has averaged around 4.0.

Rick Aristotle Munarriz owns a few stocks, Disney included. He doesn't own shares of Kodak -- nor did he figure out a clever way to tie his 1,000-word column together with Kodak's picture theme. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.

Drip Portfolio

We are currently changing providers for our portfolio data. During the transition, we won't be able to show updates of our overall returns, though we will present daily returns. Thank you for your patience.
  Ticker Company Price
 Change
 Daily Price
 % Change
 Price 
  MEL MELLON FINL CORP 1.85 7.44% 26.72 
  PEP PEPSICO, INC. 0.53 1.26% 42.45 
  JNJ JOHNSON & JOHNSON 2.06 3.92% 54.57 
  INTC INTEL CORPORATION 0.66 3.72% 18.38 
  PAYX PAYCHEX INC (0.09) (0.4%) 22.52 
      
  Trade Date # Shares Ticker Cost/Share Price  Total % Ret  
 10/07/98 46.6655 MEL 35.00 26.72  -22.94%
 07/28/00 15.2182 PEP 45.57 42.45  -4.79%
 11/14/97 39.403 JNJ 42.32 54.57  30.11%
 09/08/97 59.9456 INTC 25.10 18.38  -26.03%
 02/05/02 10.275 PAYX 34.06 22.52  -33.89%
      
  Trade Date # Shares Ticker Total Cost Current Value  Total Gain  
 10/07/98 46.6655 MEL 1,633.06 1,246.90  -386.16 
 07/28/00 15.2182 PEP 693.53 646.01  -47.52 
 11/14/97 39.403 JNJ 1,667.59 2,150.22  482.62 
 09/08/97 59.9456 INTC 1,504.68 1,101.80  -402.85 
 02/05/02 10.275 PAYX 350.02 231.39  -118.63 
Cash:483.04 
Total:5,859.36 


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Note
Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.