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Sysco Is a Smart Stock for Dividend Investors

By Dan Caplinger - Apr 7, 2013 at 2:15PM

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The food-services giant is on the elite list of Dividend Aristocrats. Here's how it got there.

Investors have always been interested in stocks that pay dividends, but lately, low interest rates on bonds and other fixed-income investments have made solid dividend payers even more valuable. Among the most promising dividend stocks in the market is Sysco (SYY 2.63%), and one big reason is that it is one of the few exclusive companies to make the list of Dividend Aristocrats. In order to become a member of this elite group, a company must have raised its dividend payouts to shareholders every single year for at least a quarter-century. Only a few dozen stocks manage to make the cut, and those that do tend to stay there for a long time.

Sysco dominates its industry, providing food products and services to hundreds of thousands of institutional clients. With its extensive distribution network, Sysco uses economies of scale to its advantage, holding off competitors by offering timely and efficient service wherever it's needed. Let's take a closer look at Sysco to see whether it can sustain its long streak of rewarding dividend payouts to investors.

Dividend Stats on Sysco

Current Quarterly Dividend Per Share

$0.28

Current Yield

3.3%

Number of Consecutive Years With Dividend Increases

43 years

Payout Ratio

59%

Last Increase

January 2013

Source: Yahoo! Finance. Last increase refers to ex-dividend date.

Has Sysco fed investors well lately?
Sysco's strong position within the industry has left it without serious competition domestically. Other food distribution businesses do exist, but they've generally had to retreat to serve smaller niches within the industry. For instance, Core-Mark (CORE) has found a profitable business serving convenience stores, with their unique needs for a mix of quick-serve snacks and other food products for travelers as well as necessities like milk for local customers. United Natural Foods (UNFI 6.35%) has turned to the organic market for its specialty, taking advantage of increasing desires from consumers for healthier foods. Yet as long as these companies stay safely in their corners of the industry, Sysco will have a stranglehold as the food-services leader.

Yet Sysco isn't invulnerable to headwinds affecting the entire food industry. Food-price inflation has been more prevalent lately, and although Sysco has enough pricing power to make its customers bear much of those added costs, its customers may nevertheless lack the financial wherewithal to be able to pay up when prices rise. Especially in the restaurant business, weakness even among high-growth eateries Buffalo Wild Wings and Chipotle (CMG 1.75%) has shown just how pervasive economic troubles are throughout the industry.

SYY Dividend Chart

Sysco Dividend data by YCharts.

One could argue that these headwinds have led Sysco to be more conservative in its dividend growth. With the company having stuck with penny-per-share increases in its dividend in each of the past four years, Sysco has been spending more on acquisitions in an effort to expand more aggressively. In particular, international markets have great potential for Sysco, and recent purchases in Canada and Ireland could be just the first steps toward a more global presence for the food-distribution giant.

When will dividends rise again?
With Sysco's most recent dividend increase having come at the beginning of the year, investors shouldn't expect another dividend increase until 2014. Ideally, Sysco will find a way to accelerate its payout growth the next time in the years to come.

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Stocks Mentioned

Sysco Corporation Stock Quote
Sysco Corporation
SYY
$79.14 (2.63%) $2.03
Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
CMG
$1,288.77 (1.75%) $22.13
United Natural Foods, Inc. Stock Quote
United Natural Foods, Inc.
UNFI
$40.89 (6.35%) $2.44
Core-Mark Holding Company, Inc. Stock Quote
Core-Mark Holding Company, Inc.
CORE

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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