Dividend investing isn't that complicated. Take a stock's dividend. Divide it by its share price. Voila -- you've just calculated the dividend yield.
Now, as a general rule, bigger is better in dividends. But there is one quirk to that rule. When a stock's share price gets smaller (i.e., when the stock "goes down"), that means you're dividing the dividend amount by a smaller number, and so the dividend yield gets bigger. Hence, a declining share price can be a great thing for folks looking to buy a new dividend stock like ExxonMobil (NYSE:XOM).
Expected to pay out $2.92 per share in dividends over the next year, and priced at just under $74 as I write this (on Tuesday), ExxonMobil currently "yields" 3.9% on its dividend. If the share price goes up between when I write this and when you read this, that dividend yield will go down. If the share price goes down, the dividend yield will go ... up! Maybe to 4%. Maybe even better than that.
But would you believe there are stocks out there that pay even better than ExxonMobil?
John Rosevear: How about a stock with a dividend yield hovering near 5%, a management team so good that Warren Buffett's Berkshire Hathaway is among the company's biggest investors, and a CEO with a credible plan to boost the company's bottom line substantially over the next five to eight years?
Or put another way, how about General Motors (NYSE:GM)?
I know, I know, GM is the poster child for American industrial companies in mismanaged decline. Or rather, it was -- and that's what makes it so intriguing as an investment.
Under CEO Mary Barra, GM has completely turned away from its old sales-numbers-at-any-cost approach to the business. Quality is up sharply, margins are good and getting even better, and GM now makes decisions based on Buffett-friendly considerations like return on invested capital.
Quietly, GM is becoming a sustainably profitable, high-tech industrial powerhouse. That makes it a compelling investment. But GM is an automaker, and automakers are cyclical companies. That raises a big question: Is GM's dividend sustainable?
I think it is: Barra, GM president Dan Amman, and CFO Chuck Stevens have learned well from GM's troubled past. The company has a substantial cash hoard intended to keep product-development well-funded even if a downturn squeezes profits.
And GM's cost structure has been completely revamped since its trip through bankruptcy court. Stevens has said that GM's "breakeven point", the point at which it starts to swing to quarterly losses in a downturn, won't be hit until the pace of U.S. auto sales falls to about 10.5 million a year. That's a very slow pace that's likely only at the low point of a steep recession: Even during the 2008-2009 economic crisis, sales were below that level for only a few months.
Long story short: At current prices, GM is paying a great dividend -- and the stock is worth considering for lots of other good reasons, too.
Sean Williams: ExxonMobil may be an energy giant with a steady dividend nearing 4%, but I believe an even more attractive dividend-paying company can be found within the industrial sector: Cummins (NYSE:CMI).
The heavy-duty engine manufacturer has slumped in recent months because of a cluster of factors. A strong dollar and weakening growth in China have hurt its overseas sales, and lower fuel prices domestically are reducing the urgency of trucking companies to switch to more fuel-efficient tractors. Weaker commodity prices have also hurt off-highway engine demand. In fact, Cummins' shares are down more than 40% over the trailing 12 months.
But I suspect things are only going to better for this heavy-duty giant. To begin with, we've got ample access to cheap capital in the United States. Low lending rates provide an impetus for trucking companies to expand capacity. Furthermore, with the stock market slumping badly since the beginning of the year, it's plausible that the Federal Reserve will hold off on any additional rate increases in the near-term. It's only a matter of time before the economy cycles up once more, and this is the perfect time for trucking companies to consider using their strong operating cash flow to improve capacity.
Another key selling point for Cummins is that its strong market share helps it maintain pricing power and generate predictable cash flow. As of this past August, Cummins had 39% market share in the heavy-duty engine market in North America as reported by Barron's, but it also had nearly three-quarters of all share in the medium-duty market. Having such substantial share typically translates into strong loyalty among truck makers and drivers, and leaves Cummins with strong pricing power.
My suggestion here would be to simply play the cycles to your advantage. Cummins has done a great done of maintaining or growing its market share, is valued at a reasonable 10 times forward earnings, and it has a dividend yield of 4.6%, which is more than twice what the S&P 500 index is currently paying out. It's a brand-name company that should deliver strong gains for your portfolio over the long run.
Rich Smith: I'll jump on the bandwagon with a third industrials stock. But in fact, my nomination for a better-than-Exxon dividend payer has ties to the worlds of both industrial companies and energy. Whether your investment strategy has you focusing on either of these two sectors, I think you'll find a lot to like in Eaton Corporation (NYSE:ETN).
Sure, Exxon's 4%-ish divvy is attractive, but Eaton has it beat with a yield currently surpassing 4.5%. A diversified manufacturer, Eaton works on everything from hydraulics to automotive to aerospace -- but does the bulk of its business in electrical products and systems, where 60% of its revenues originate. In today's increasingly electrical world, which is moving rapidly to emphasize solar power and electric cars, that's a good business to be in, and Eaton is making the most of it.
Over the past year, Eaton generated nearly $2 billion in positive free cash flow from its business. The knowledge that 96% of Eaton's net income is backed up by cold, hard, cash profits lends a dividend investor a lot of confidence that those dividend checks will come on time and when promised. In contrast, while Exxon generated twice as much cash as Eaton last year ($4.1 billion), that was 79% less than the $19.9 billion it reported as net profit on its income statement.
Best of all, while analysts who follow Exxon expect its earnings to decline 12% on average over the next five years, analysts polled by S&P Capital IQ say Eaton's earnings will grow at better than 8% over the same period.
Tic-tac-toe -- better free cash flow, better growth, and a more generous dividend all make Eaton Corp a better dividend play than ExxonMobil.
And there you have it, folks. We promised you three stocks paying better dividends than ExxonMobil, and we've delivered. Three stocks, each paying more than ExxonMobil, and arguably, each with better prospects than Exxon boasts as well.
One thought? Before pressing any "buy" buttons, click on over to our Motley Fool discussion boards, and see what other investors think of these stocks. Two heads are better than one, and the tens of thousands of Fool readers populating our discussion boards are even better than that.
John Rosevear owns shares of General Motors. Rich Smith has no position in any stocks mentioned. Sean Williams has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Cummins. The Motley Fool owns shares of ExxonMobil. The Motley Fool recommends General Motors. 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.
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