Cisco, Phillips 66 Have Dividend Appeal to Investors
Posted: October 11, 2016
A lot of ink has been spilled lately about whether high-dividend stocks are overvalued.
With interest rates scraping the bottom, investors have been starved for income. So stocks that pay good dividends surged in the first half of this year. They were due for a decline, and got one in the past few weeks.
To me, the argument is a sideshow, because I don’t care about dividend yield alone. I’m more interested in stocks that have been increasing their dividend.
Why? Because dividend hikes are a sincerity barometer. They show that a company’s management thinks earnings progress is sustainable. No company wants to raise its dividend, only to turn around and cut it the next year.
Track record
I usually write one column each year on stocks with dividend appeal — both an above-average yield and a pattern of dividend growth.
The column you’re reading is the 17th in this series. Stocks recommended in the first 16 columns have averaged a 14.2 percent total return over 12 months.
That compares favorably with the average 12-month return of 8.7 percent on the Standard & Poor’s 500 Index over the same 16 periods. Thirteen of my 16 Dividend Appeal columns have been profitable, and 10 of them have beaten the index.
Keep in mind that my column picks are theoretical and don’t reflect actual trades, trading costs or taxes. The record of my column selections shouldn’t be confused with the performance I achieve for clients. And past performance doesn’t guarantee future returns.
So much for the good news. The bad news is that I’ve been on a cold streak the past two years, generating losses instead of gains. Last year, my Dividend Appeal selections suffered a 15.4 percent loss, highlighted by a 35.7 percent plunge in GameStop Corp. Meanwhile, the S&P 500 returned 9.9 percent.
I still believe that the rising-dividend method has merit and will prove itself anew. So here are my five Dividend Appeal picks for the coming 12 months.
Amerisafe
We’ll lead off with Amerisafe Inc. (AMSF). Based in DeRidder, La., the company sells workers compensation insurance. It especially serves hazardous industries such as construction, trucking and bridgework. Amerisafe has shown a profit 10 years in a row. It began paying a dividend in 2013 and has increased the dividend each year since. Right now, the yield is 6.2 percent. (Yield is the dividend as a percentage of the stock price.) Furthermore, Amerisafe has no debt, a quality I like.
Schweitzer-Mauduit
From Alpharetta, Ga,, comes Schweitzer-Mauduit International Inc. (SWM). It makes specialty papers, such as cigarette wrappers, battery wrappers and food-service packaging. It also makes films and filters.
I’ve owned this stock on and off in accounts of clients to whom dividends are important. It currently boasts a 4.2 percent yield, and a 42 percent dividend-growth rate over the past five years. One negative is that debt is fairly high, at close to 99 percent of equity. That’s not too bad, but I prefer lower.
Phillips 66
One of Warren Buffett’s favorite stocks, Phillips 66 (PSX) is among the largest U.S. refineries. Buffett’s company, Berkshire Hathaway, owns about 15 percent of Phillips 66, which is based in Houston.
The company has increased its dividend at a 29 percent clip over the past five years and currently offers a 3.1 percent yield. Refining is a tough business with heavy competition both within the United States and abroad. However, I think Phillips 66 is solid and will continue to be a good income stock.
Cisco Systems
Cisco Systems Inc. (CSCO), the computer networking giant, had great years in 2005-08, when it easily topped a 20 percent return on stockholders’ equity each year. Those glory days are past, but the figure for the past four quarters was 17.5 percent, which is more than respectable.
Management apparently believes that progress is sustainable, because it has raised the dividend at a 29 percent clip the past five years. The current yield is 3.3 percent.
Met Life
The era of low interest rates has been unkind to many insurance companies. They typically invest their “float” (the money they get from premiums and haven’t yet paid out in claims) in bonds. But bonds have been low-yielding.
Met Life has suffered along with the rest. Yet it has stayed profitable every year except for 2009. It has increased its dividend at about a 22 percent pace the past five years. The stock currently yields 3.4 percent.
Disclosure: I own Schweitzer-Mauduit and Met Life shares for a few clients. I also own Cisco Systems for some clients who already held it before I began managing their accounts.