Will These 5 Dividend Stocks Soar or Stumble in 2013?http://www.fool.com/investing/general/2013/01/08/will-these-5-dividend-stocks-soar-or-stumble-in.aspx Justin Loiseau
January 8, 2013
There's only one thing I love more than a dividend stock -- a dividend stock with growth potential. There are a whole lot of companies out there flaunting oversized dividends and tales of grandeur with nothing to back them up. Let's take a closer look to see what companies can truly pull profits for your portfolio in 2013.
Look to the past
Atlantic Power (NYSE: AT) surged to the lead in the past year, but it doesn't have the track record to back it up. Founded in 2004, the utility initiated a dividend for the first time in 2010 and adheres to a monthly distribution schedule. National Grid (NYSE: NGG) is a bit of an oddball, since a 2010 stock slump and steadfast dividend payout resulted in a record 16.8% yield. Since then, things have cooled down and the utility's back to a more reasonable 5.9% yield. Southern Company (NYSE: SO) and Consolidated Edison (NYSE: ED) have contracted slightly over time, while Exelon (NYSE: EXC) offers the only steady positive trajectory of any stock listed here.
Sustainability is king
Utilities are capital intensive companies, and are constantly balancing capital expenditures with dividend payouts. Examining a utility's payout ratio (dividends paid as a percentage of net income) is fairly useless, since net income is not much more than an accounting gimmick for companies that rely on deferred costs, depreciation, amortization, and other tools to smooth out their monetary mayhem.
Instead, calculating how much of a company's free cash gets sectioned off for dividends can tell us a lot about a dividend's staying power.
Elephant in the room: In the same way that National Grid's yield skyrocketed when its stock price dropped, Southern Company's 2011 dip into negative cash flow temporarily blasted its steadfast dividend into unsustainable territory. Today, the company enjoys positive cash flow, but is paying out 850 times its cash on hand to keep its dividend at 4.4%. Southern Company has spent over $4 billion in capital expenditures each year since 2009 as it ramps up its nuclear efforts and builds "clean coal" generation facilities, but it's stretching its finances a bit too thin for my liking.