With the Federal Reserve showing no sign of increasing interest rates anytime soon, disheartened income investors are frustratingly packing up their duffels and pursuing yield elsewhere. Smart investors are forgoing bonds and instead thumbing a ride down the dividend-paying stock road.
In the 20 years from the beginning of 1992 through the end of 2011, stocks not paying dividends returned 3.9% on average each year. Stocks paying dividends returned 8.9%, and stocks raising dividends each of the 20 years returned an impressive 9.9%.
I've sifted through the stock universe to uncover what I think is a dividend powerhouse.
Who's on deck?
Today we'll examine Intel (Nasdaq: INTC ) , the world's largest manufacturer of microprocessors with 80% of the total market share. Companies like Intel transform our computers and mobile devices from dumb hunks of plastic and wires to smart, lightning-speed research and communication tools. Typically, tech stocks are fish out of water in the dividend ecosystem, but Intel appears amphibious.
What makes a stock a dividend powerhouse?
A dividend powerhouse is purely my opinion as to what makes a stock not only a generous dividend payer, but also one that pays them sustainably. Many stocks pay behemoth dividends, but a true dividend powerhouse pays dividends that won't deplete the business. They also boast healthy balance sheets, trade at enticing valuations, and have a history of increasing their dividends.
Of my seven dividend powerhouse criteria, four relate purely to the dividend. A dividend payout ratio between 33% and 60% indicates the stock is considered a healthy investment because it gives out a good profit to shareholders, while sustaining company growth. My other dividend criteria examine the payout history and dividend growth.
Two criteria relate to the health of the company's balance sheet. Positive free cash flow indicates that a company has sufficient cash flow to pay a dividend without having to take on debt to do so. Low debt-to-equity points to a nimble company that isn't saddling the balance sheet with tons of debt to finance its assets.
One criterion relates to the current stock valuation. Obviously, you should prefer to buy a stock when it's attractively priced.
Let's see if Intel, which currently pays a 3.3% dividend yield, makes the grade.
Go or No Go?
|Dividend Payout Ratio||Between 33% and 60%||34%||Go|
|Consecutive Years of Dividend Increase||> 5 years||8 years||Go|
|5-Year Average Dividend Yield||> 2%||2.9%||Go|
|5-Year Dividend Trailing Growth||> 10%||13%||Go|
|Negative Free Cash Flow in Past 5 Years||No||No||Go|
|P/E vs. Industry||Less Than Industry||10.1 vs. 18.8||Go|
|Total Score||7 out of 7|
Sources: Yahoo! Finance, Edward Jones.
Boasting a perfect score of seven out of seven, Intel is the teacher's pet proudly perched at the head of the class. With a dividend payout ratio of 34%, the stock is considered a healthy dividend payer bestowing profit on shareholders, while sustaining company growth. Intel enjoys a very modest level of debt and trades at a much more attractive valuation than its classmates.
In good company
Several semiconductor companies, like Intel, actually pay very impressive yields. These include Applied Materials (Nasdaq: AMAT ) , Texas Instruments (NYSE: TXN ) , and STMicroelectronics (NYSE: STM ) , which pay 3.6%, 2.5%, and 6.7%, respectively. But how sustainable are the dividends of these companies?
STMicroelectronics boasts a payout ratio of 103%, which does not seem sustainable. Both revenue and net income are down from last year, and the stock is off nearly 56% over the past year.
Applied Materials' dividend payout ratio is 31%, nearly within the sweet spot range. The company has significantly increased revenue and net income in the past two years and is focusing on chips for mobile devices after experiencing headwinds in its solar cell manufacturing business.
Both revenue and net income were down for Texas Instruments from last year; its payout ratio hovers in the sweet spot at 39%. However, its debt-to-equity ratio is nearly 48%, which is significantly higher than Intel's 16%.
Meanwhile, rival Advanced Micro Devices (NYSE: AMD ) doesn't pay a dividend and instead plows back earnings into the company. As smartphone and tablet sales now outpace PC sales, investors will surely be watching to see if AMD can keep up with longtime rival Intel in the mobile processor market. AMD is soon expected to make headway in the tablet space, but has yet to mark its entry in the smartphone market.
Dividend powerhouse: Go or no-go?
Intel is in a dominantly competitive position within the semiconductor industry. Its large size provides tremendous scale advantage over smaller rivals. And the company has a strong balance sheet with low debt levels compared to peers and generates substantial free cash flow.
Intel's board of directors recently increased its quarterly dividend 7%, which represents the third dividend increase in the past 18 months, and underscores Intel's impressive financial strength. I think Intel is a real dividend powerhouse and currently appears to trade at a sensational value.
Foolish bottom line
Every investor is unique, with distinct investment goals and income needs. However, no investor wants to outlive his or her money. If you want to build a portfolio that will generate rising income to ensure that you can afford gas, groceries, and health care in the years to come, buying dividend powerhouse stocks is a huge step in the right direction.
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