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Five Dividend Darlings With Low Payout Ratios
Large industrial conglomerates and utility companies are often referred to as widow-and-orphan stocks because of their relatively low risk and secure dividends. Ideally they will provide a steady stream of income to the poor widows and orphans. Well, in this economy most investors are poor on paper, so looking for some cash flow protection provided by dividends is looking like a good idea. (Find out how this "first love" still holds its bloom as it ages, read Dividends Still Look Good After All These Years.)
Mature established businesses such as blue chip companies usually maintain a constant growing dividend. For example, Clorox (NYSE:CLX) producer of many household cleaning products from bleach to soap, has raised it's dividend 9% per year on average over the last 10 years. On top of the dividend growth, the company is well established internationally which should reassure investors of the company's stability. On December 12, Jefferies & Co. initiated coverage of Clorox at a 'buy' due to its steady growth and resilience potential during this recession.
Is Your Dividend Safe?
High dividend yields is one thing but will the dividend continue is another, this is where the payout ratio come in. The payout ratio is a comparison of the dividends per share to the earnings per share and gives insight into how well the earnings can support the dividend. Usually you would be looking for under 60% as a signal that the cash flow has a good chance of continuing, anything over 70% is suspect and over 100%, though rare, is a red flag that the dividend will be reduced. (To learn more about the benefits of dividends, check out Dividends Still Look Good After All These Years).
Hard to Substitute a Harley
I would not think about Harley Davidson as a particularly recession-proof stock due to its non-essential nature. The $1.32 dividend, yielding 8%, does help reduce the downside risk and the payout ratio is relatively low. On December 15, president and CEO Jim Ziemer announced his retirement will come in 2009 after 40 years with the company. Not the best time to start drawing on your retirement funds. But don't worry about him, Ziemer made about $20 million in the last five years, according to Forbes.com.
Harley's earnings per share were 71 cents in the three months ending September 28, 2008. That's a drop of 34% over the same time period in 2007. That's not exactly the number an investor would be hoping for, but when compared to its price you get a P/E multiple of 5.35 which is well below the industry average of more than 12. Harley Davidson has always been one of those iconic brands which can't be substituted for a different bike. For that reason alone Harley could weather the storm and an investor would receive the cash flow. (For more on this, check out How Dividends Work For Investors.)
Oshkosh Finds Defense Contracts
Oshkosh is a designer and manufacturer of specialty vehicles and vehicle bodies. Its defense related division has been scooping up contracts, most recently adding a $250 million job to produce 825 new vehicles for the U.S. Army. Oshkosh also sells armor protection for vehicles already in the field or for replacement. The stock is up 114.5% from November 20 close of $3.92 to December 16 close of $8.41. But over the year it has been hit hard down 82% in 2008. Fiscal 2008 ended on September 30, 2008, which ended with revenue up 13.2% to $7.14 billion and net income down 70% to $79.3 million. Diluted earnings per share of $1.06 were down from 2007's $3.58.
Bottom Line
Investing in dividend-paying stocks definitely has its advantages. After all, stocks with high dividend yields generally offer more downside risk protection than growth stocks. When earnings take such a huge dive, it is hard for the stock price to hold up, regardless of the consistency of the dividend, but a portfolio of stocks with high dividend yields may experience less price volatility than a portfolio built entirely of sexy growth stocks.
If you are looking to beef up your portfolio with some dividend darlings, usually the best place to start hunting is with stocks that have paid out increasing dividends consistently over a period of years. Generally speaking, the longer a company has paid out a high dividend yield, the more likely it is to continue doing so in the future.
To learn more about the compound nature of dividend returns, check out The Power of Dividend Growth.
Mature established businesses such as blue chip companies usually maintain a constant growing dividend. For example, Clorox (NYSE:CLX) producer of many household cleaning products from bleach to soap, has raised it's dividend 9% per year on average over the last 10 years. On top of the dividend growth, the company is well established internationally which should reassure investors of the company's stability. On December 12, Jefferies & Co. initiated coverage of Clorox at a 'buy' due to its steady growth and resilience potential during this recession.
Is Your Dividend Safe?
High dividend yields is one thing but will the dividend continue is another, this is where the payout ratio come in. The payout ratio is a comparison of the dividends per share to the earnings per share and gives insight into how well the earnings can support the dividend. Usually you would be looking for under 60% as a signal that the cash flow has a good chance of continuing, anything over 70% is suspect and over 100%, though rare, is a red flag that the dividend will be reduced. (To learn more about the benefits of dividends, check out Dividends Still Look Good After All These Years).
| Company | Forward Dividend Yield | Market Cap | Payout Ratio |
| Clorox (NYSE:CLX) |
3.5% | 7.3 B | 49% |
| Crane Co (NYSE:CR) |
5.2% | 938 M | 24% |
| Harley Davidson (NYSE:HOG) |
8.10% | 4.0 B | 38% |
| Limited (NYSE:LTD) |
6.9% | 2.7 B | 37% |
| Oshkosh (NYSE:OSK) |
4.8% | 622 M | 38% |
|
Forward annual dividend yield data according to Morningstar |
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Hard to Substitute a Harley
I would not think about Harley Davidson as a particularly recession-proof stock due to its non-essential nature. The $1.32 dividend, yielding 8%, does help reduce the downside risk and the payout ratio is relatively low. On December 15, president and CEO Jim Ziemer announced his retirement will come in 2009 after 40 years with the company. Not the best time to start drawing on your retirement funds. But don't worry about him, Ziemer made about $20 million in the last five years, according to Forbes.com.
Oshkosh Finds Defense Contracts
Oshkosh is a designer and manufacturer of specialty vehicles and vehicle bodies. Its defense related division has been scooping up contracts, most recently adding a $250 million job to produce 825 new vehicles for the U.S. Army. Oshkosh also sells armor protection for vehicles already in the field or for replacement. The stock is up 114.5% from November 20 close of $3.92 to December 16 close of $8.41. But over the year it has been hit hard down 82% in 2008. Fiscal 2008 ended on September 30, 2008, which ended with revenue up 13.2% to $7.14 billion and net income down 70% to $79.3 million. Diluted earnings per share of $1.06 were down from 2007's $3.58.
Bottom Line
Investing in dividend-paying stocks definitely has its advantages. After all, stocks with high dividend yields generally offer more downside risk protection than growth stocks. When earnings take such a huge dive, it is hard for the stock price to hold up, regardless of the consistency of the dividend, but a portfolio of stocks with high dividend yields may experience less price volatility than a portfolio built entirely of sexy growth stocks.
If you are looking to beef up your portfolio with some dividend darlings, usually the best place to start hunting is with stocks that have paid out increasing dividends consistently over a period of years. Generally speaking, the longer a company has paid out a high dividend yield, the more likely it is to continue doing so in the future.
To learn more about the compound nature of dividend returns, check out The Power of Dividend Growth.
by
Peter Cherewyk
Peter Cherewyk has worked in the financial field for over 10 years. He completed his Bachelor of Commerce from the University of Alberta, and is currently working towards a Chartered Financial Analyst designation. He enjoys hockey and hiking and the opportunity to teach others.
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