Forbes
20 dividend-payers for the long haul
Need motivation to stand by a beaten-down value stock like Merck? Just keep your eye on the bottom line.
By John Buckingham, Forbes
Any student of stock-market history knows dividend income has accounted for a significant portion of the total return generated by equities over the past three-quarters of a century. According to the just-published Risk Premia Over Time Report from Ibbotson Associates, dividends accounted for 4.3% of the 10.4% annualized return for large-cap stocks from 1926 through 2003. For midcap stocks, dividends accounted for 4.1% out of 11.3%; for small-cap stocks, it was 3.8% out of 11.7%; and for microcap stocks, 2.6% out of 12.7%. Subtract inflation and the importance of dividends comes into sharper relief. Dividends have accounted for well over half of the long-term real return on big-company stocks.
Yet despite the recent tax benefits, most investors pay little attention to dividends. That's a serious mistake. Before the Bush tax cut, dividends labored under a heavy handicap -- they were taxed twice: once when the company earned the money, a second time when the dividend passed into the hands of the investor. Today the maximum federal tax rate on most dividends is 15%. For a taxpayer in the top federal tax bracket of 35%, a 3% dividend yield is equivalent to a 4% yield on a taxable bond. Not bad.
My picks of dividend-paying value stocks all yield more than double the average money market fund.
| 20 stocks to buy now for the long haul | | Company | June 1 price | Yield | | Alcoa (AA, news, msgs) | $31.25 | 2.0% | | Abbott Laboratories (ABT, news, msgs) | 41.01 | 2.6 | | Allstate (ALL, news, msgs) | 43.97 | 2.5 | | DuPont (DD, news, msgs) | 43.18 | 3.3 | | General Motors (GM, news, msgs) | 45.02 | 4.5 | | Hewlett-Packard (HPQ, news, msgs) | 21.17 | 1.6 | | H&R Block (HRB, news, msgs) | 48.12 | 1.6 | | International Paper (IP, news, msgs) | 42.11 | 2.5 | | KB Home (KBH, news, msgs) | 65.32 | 1.6 | | Lockheed Martin (LMT, news, msgs) | 49.11 | 1.8 | | Mattel (MAT, news, msgs) | 17.52 | 2.3 | | Merck (MRK, news, msgs) | 48.36 | 3.2 | | Marathon Oil (MRO, news, msgs) | 34.25 | 3.0 | | Norfolk Southern (NSC, news, msgs) | 23.99 | 1.3 | | Olin (OLN, news, msgs) | 15.78 | 5.1 | | OMI (OMM, news, msgs) | 11.29 | 1.9 | | SBC Communications (SBC, news, msgs) | 23.74 | 5.1 | | Sara Lee (SLE, news, msgs) | 22.90 | 3.3 | | Traffix (TRFX, news, msgs) | 7.18 | 4.7 | | Washington Mutual (WM, news, msgs) | 42.99 | 4.3 |
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With dividends more attractive, many companies managements have raised or initiated dividends payouts. Companies that previously preferred to reinvest their earnings now give shareholders cash. These include Microsoft (MSFT, news, msgs), Qualcomm (QCOM, news, msgs), Best Buy (BBY, news, msgs), Mandalay Resort (MBG, news, msgs) and American Power Conversion (APCC, news, msgs). Thus investors can now own growth stocks without forgoing cash returns. All five of these companies now yield more than the 0.5% average yield of money market funds.
Get rich slowly
The Prudent Speculator, my newsletter, looks for companies that trade for low multiples of sales, earnings and/or book value. We also invest in cyclical companies we think are ready to move to the upward part of their cycle -- in short, solid companies with good prospects that are beaten down and temporarily out of favor. We buy for three- to five-year appreciation potential, and we hold our companies for more than six years on average.
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Yet those time periods strain the investment horizons of most investors. Here's where dividends help: When a stock pays them, the quarterly payments may be small, but they give you a reasonable return while you wait for the long-term gains.
We make no apologies for this get-rich-slowly approach to investing. It is a fundamental fact of investing that the longer you hold a diversified portfolio the lower your risk of exiting at a loss. So we are content to let others knock themselves out for short-term performance.
Going slow will propel you to the top of the performance heap. The short-termers chasing momentum today will have dropped out by the time you retire. (What happened to all those day traders getting rich in 1999?)
A diversified list
Buying beaten-down stocks is not without risk. Not all the fallen rise again; we do come up with some losers. So, diversify. There should be at least 20 stocks even in a small portfolio. In the table above, I have chosen 20 dividend-paying stocks from the 1,000 stocks we follow. All yield more than double the average money market fund yield. The set yields 3%.
Don't expect quick gains from this list. But each of the stocks meets the standards of value that we have applied successfully for 27 years. Each should also yield a nice cash return while you wait for what I expect will be outsize gains.
Online database management and marketing concern Traffix (TRFX, news, msgs) recently instituted an 8-cent quarterly dividend, giving it a yield of close to 5%. Recent revenues have been weak at this Internet company, but the debt-free balance sheet sports nearly $3 a share in cash, and Traffix has been profitable in 18 of the last 19 quarters. We look for better times ahead for this solid company.
The shares of financial-services giant Washington Mutual (WM, news, msgs) have been dragged down by interest-rate worries. The yield is better than 4%. You can afford to wait for other investors to get over their interest-rate worries.
General Motors (GM, news, msgs) also yields more than 4%, and the stock is priced at eight times trailing 12-month earnings (before nonrecurring items). Consensus per-share forecasts call for $7.16 in 2004 and $7.36 in 2005. We have a long-term $109 price target on GM.
Pharmaceutical heavyweight Merck (MRK, news, msgs) has bounced back from multiyear lows, but this financially impeccable company trades for just 16 times earnings, well down from its mid-20s historical average. Throw in a better than 3% yield and you have a stock that looks irresistible by our standards.
Those dividends add up. They can turn a mediocre return into a market-beating one.
John Buckingham of Al Frank Asset Management writes the Prudent Speculator, a contrarian, value-oriented investment newsletter.
Copyright 2004 Forbes.com. All rights reserved.
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