Should These 2 Stocks Be Raising Their Dividends?

Family Dollar Stores and Hanesbrands both raised their dividends big-time! Was this a smart move?

Feb 1, 2014 at 9:15AM

For their most recent quarter, clothing giant Hanesbrands (NYSE:HBI) and discount retailer Family Dollar (NYSE:FDO) both raised their dividends substantially. Family Dollar increased its dividend 19.2%, while Hanes upped its payout 50%. 

I recently wrote an article explaining that many dividend increases are not as good as they seem, but that's not the case with these stocks. Both stocks are examples of companies that should be raising their dividend. Here's why I'm bullish on these dividend increases.

When dividend increases are a smart move
I've often said that I wish investors would stop viewing all dividend increases as a "good idea." Since I've pointed out the opposite end of the spectrum, let's discuss which factors make dividend growth healthy. 

1. A stable (even boring) business model
What we're looking for here is proof that the company in question will not be disrupted. Both companies have strong brand names -- Family Dollar through its namesake dollar stores, and Hanes through its collection of brands (e.g., Hanes, L'eggs, Playtex) that help provide a steady stream of earnings.

These industries aren't facing headwinds. The one major retail disruptor, Amazon, can't sell things cheaper than Family Dollar does, and it can only boost Hanesbrands by selling its products on its website. 

This isn't the case with most dividend payers, unfortunately.

For instance, McDonald's and Wendy's pay hefty dividends that some investors could question, even though their businesses are well established. Given the disruption being created by fast-casual chains like Panera, and consumers gravitating toward healthier food choices, you could argue that their dividend cash could be better allocated elsewhere.

But are there any major disruptive competitors in the T-shirt or dollar store business? There are competitors, but no disruptions that I can think of.

The point is that this, to me, is the first thing to examine when determining a dividend's validity. Companies in a fast-paced industry, in hyper-growth mode, or those facing headwinds should consider avoiding a dividend payment.

2. A lack of better options for capital
In my opinion, a business like Apple, which needs to innovate, shouldn't be paying a dividend. But Family Dollar and Hanesbrands?

Family Dollar can open new stores (provided they continue to generate a high return on capital) and Hanes can acquire additional brands, such as its recent acquisition of the Maidenform brand. There are relatively few other places to spend the money wisely. 

Hanes gets a pass, in my opinion, for raising its dividend 50% shortly after this acquisition for two reasons. First, it still boasts a sub-50% payout ratio (we'll talk more about that in a moment) and second, as the chart below illustrates, Hanes (and Family Dollar) has a track record of positive earnings with these respective strategies in good and bad times. 

FDO EPS Diluted (TTM) Chart

FDO EPS Diluted (TTM) data by YCharts.

These companies have also reached a point of saturation to an extent, or at least a lack of hyper-growth. Family Dollar, for instance, already has 7,900 stores in 46 states. How many additional stores can Family Dollar add without cannibalizing itself?

They do not have high R&D costs or ridiculous advertising expenditures; their brands are household in nature. Hanes isn't going to reinvent the T-shirt or bra dramatically, and Family Dollar will do even less to change the dollar store concept. This gives both companies three options for their cash: bank it, make acquisitions, or pay dividends. 

You can argue which is the best strategy. The point being, companies that only have those three options are the types that should be raising their dividend. Hanes and Family Dollar are right to do so.

3. Low payout ratio
The most overlooked, yet most critical, element to evaluating whether a dividend makes sense is the payout ratio -- the percentage of earnings that a company pays in dividends (or, the dividends divided by EPS).

This ratio matters simply because a company, even a boring one, needs to reinvest some capital into its business. Not to pile on Wendy's, but let's take a look at it as an example again. The company is paying more in dividends than it earned last year, and nearly as much in dividends ($0.20) as it's expected to earn this year ($0.27/share). While I love Wendy's burgers, I don't feel like that's a wise strategy for any company.

Now let's look at our two stocks. While they both increased their dividends by double digits, their payout ratios are well below 50%. This will provide them with additional funds to reinvest in their business.

More important, the low payout ratio means that both companies will have more flexibility to raise their dividend going forward, which is a catalyst that could send the stocks higher. 

Dividends: Stability matters
These are two companies that might typically be overlooked by dividend investors, because they both pay yields below 2%. The stock market, however, is all about the future. When you consider the stable nature of these businesses, and their low payout ratios, their dividend future is brighter than most.

If you're venturing into the world of dividend investing, I would recommend you look for stability, over yield, in your stock purchases.

Looking for stable dividend stocks? Your'e invited to check out The Motley Fool's special report "The 3 Dow Stocks Dividend Investors Need." It's absolutely free, so simply click here now and get your copy today.


Adem Tahiri has no position in any stocks mentioned. The Motley Fool recommends and owns shares of, Apple, McDonald's, and Panera Bread. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers