As we look toward a new year with renewed determination to be better investors, we'd do well to include some solid dividend-paying stocks in our portfolios. Dividends from healthy, growing companies deliver to us, like mail carriers, in any kind of weather -- boom, bust, or stalled economy.
All year long I've written articles reviewing dividend payers from a host of different industries. Now that the year is coming to a close, I thought that it would be interesting to review the ones that seemed most compelling, and among them, to single out some that feature fast dividend growth rates, promising prospects, and a lot of thumbs-ups from our CAPS community of investors.
It's important to note, of course, that a fast dividend growth rate is never enough. Iron ore and coal company Cliffs Natural Resources (CLF +1.63%), for example, sports a hefty dividend yield near 7% and a five-year average annual growth rate for it of 33%. That might seem hard to beat, but keep in mind that, as often happens, the high yield is due to the stock having fallen (by more than 40% over the past year). Some worry that the dividend isn't sustainable, as Cliffs struggles along with the coal industry. Still, its fortunes should change once the auto industry and others are recovering more strongly, as Cliffs' metallurgical coal is used in making steel. Some see the stock as attractively priced now, but others see it on rather shaky ground.
Standouts
Below are a few companies about which you might want to learn more.
|
Company |
Recent Yield |
5-Year Avg. Annual Div. Growth Rate |
Payout Ratio |
|---|---|---|---|
|
RPC (RES +2.83%) |
2.6% |
23.6% |
23% |
|
Corning |
2.8% |
22.2% |
24% |
|
BHP Billiton |
2.9% |
21.2% |
38% |
|
CSX (CSX 0.53%) |
2.8% |
20% |
29% |
|
Flowers Foods (FLO +1.29%) |
2.7% |
16.4% |
70% |
|
China Mobile |
3.3% |
16% |
37% |
|
Johnson Controls (JCI 1.30%) |
2.6% |
15.7% |
40% |
|
Alliance Resource Partners |
7.5% |
12.4% |
65% |
Source: Motley Fool CAPS.
Don't be put off by lots of current yields below 3%. If a 2.8% dividend grows by even 10% annually, it will become 4.5% in just five years. It's fair to chase high yields, but some of them can take a long time to grow much more. The companies above have been boosting their payouts substantially in recent years. Such high rates can't last forever, but given fairly low payout ratios for most of the companies, they stand a good chance of continuing for more years. (A payout ratio reflects the portion of a company's earnings being paid out in dividends.)
Zeroing in
Let's look at a few of the companies above in more detail.
CSX has been posting solid results and investing heavily in its future, including some intermodal projects that will boost its flexibility and growth prospects. It's poised to prosper once the economy heats up again, as railroads are critical for transporting goods across the nation. Railroads are more cost-effective than trucks, and CSX is more operationally efficient than many of its peers. Soft demand for coal transportation has been a problem, but it's still getting coal business, from areas without easy access to natural gas. It's also expanding into new and profitable areas, such as logistics services. One threat at the moment is a possible longshoremen strike that could hurt business.
Johnson Controls isn't well known, but it's well represented across the nation, as it's a "Tier One" supplier to the auto industry. The company has suffered from weak battery sales lately, as Americans have been hanging on to cars longer before buying new ones. A weak euro and strong competition have also hurt it. But as our economy recovers, auto sales should rise -- as the company is already projecting. And in the meantime, Johnson Controls is broadening its reach in China, developing hybrid batteries, and expanding its capacity. Its battery competitor A123 went out of business, which can boost Johnson Controls' business -- though A123 is being acquired by a Chinese company. Johnson Controls has been paying dividends since 1887!
Flowers Foods is growing effectively by buying smaller bakeries and adding them to its large distribution network, but some think it's risen so much lately (up 28% this year) that it's not a bargain at the moment. Others note that its valuation is still below industry averages and like the company's distribution network, among other things. One worry, though, is the recent drought, which should lead to higher input prices, putting pressure on profit margins. Some are waiting to see if the company will make a bid for Twinkie maker Hostess.
RPC is an oil-field services company, and looks attractive, with its recent P/E ratio, price-to-sales ratio, and price-to-cash-flow ratio well below its five-year averages, and its forward P/E ratio at just 11. The company recently reported estimate-topping earnings and announced a special extra dividend, as well, to be paid before year-end. In recent years, its revenue has been growing at double-digit rates, though earnings growth has been lumpier.
