Dividends Don’t (Usually) Lie
Posted: October 02, 2024
September 30, 2024 (Maple Hill Syndicate) – Geraldine Weiss, who died two years ago at age 96, was a successful investment newsletter writer at a time when few women were prominent in finance. She wrote a book called Dividends Don’t Lie.
Weiss’s investment strategy was to invest in stocks with a dividend yield above that stock’s own historical average. It’s a contrarian strategy, based partly on the premise that the company’s stock may be temporarily depressed, pushing up the dividend yield.
Gurufocus.com, one of my favorite investment web sites, maintains a screen that looks for such stocks. Its title is “Historical High Dividend Yields.”
To qualify, a stock must have gone 15 years or more without reducing its dividend. The yield must be at least 4%. And the company must have at least $2 in profits for each dollar it pays out in dividends, reducing the risk of a dividend cut.
From that screen, I’ve selected five stocks to recommend today.
U.S. Bancorp
One of the largest regional banks, U.S. Bancorp. (USB) is based in Minneapolis, Minnesota. It maintains branches in 26 states, mostly in the Midwest and West.
The stock hit a high of $63 about three years ago, and has subsided to about $45. The Federal Reserve’s campaign in 2022-2023 to raise short-term interest rates (in an attempt to kill inflation) hurt many banks by raising what they must pay on deposits.
Now the Fed is headed the other way, and I think the banking industry will have an easier time in 2025 and 2026. US Bancorp yields 4.3% in dividends, which is about a point and a half above its normal level.
Magna International
People think of car companies as manufacturers. But to some degree, they are simply assemblers, putting together an array of sub-assemblies made by parts manufacturers.
Magna International Inc. (MGA), based in Aurora, Ontario Canada, is one of the largest auto parts companies in the world. It makes chassis, roofs, seats, electronics and other parts. General Motors, Mercedes and BMW are among its customers.
The stock is down almost 28% this year even though revenue and earnings were up. The dividend yield is 4.4%, which is almost double the 10-year median.
Walgreens
Carrying a freakishly high dividend yield of 13.6%, Walgreens Boots Alliance Inc. (WBA) is a troubled company and a potential turnaround story. The stock has descended from more than $96 a share a decade ago to barely above $9 a share now.
Back in 2014, Walgreens acquired Boots, a leading British chain. That big bite ended up giving the company indigestion. Debt has gradually grown, and now is 2.4 times the company’s net worth.
The drugstore industry has problems, including stingier reimbursement from insurers on drug sales, competition from online retailers, Walmart and Target, and a rise in merchandise theft.
Those problems seem severe but not insurmountable. The stock, pummeled badly, now sells for less than five times earnings. The sky-high current dividend yield compares with a ten-year norm of about 3.3%.
UGI
UGI Corp. (UGI), based in King of Prussia, Pennsylvania, distributes natural gas, propane and electricity, mostly in Pennsylvania and West Virginia. It also operates in eight countries outside the U.S., including Austria, France Poland and Switzerland.
The company was founded in 1882 and took its current name in 1968. The initials came from its previous name, United Gas Improvement Corp.
One of UGI’s units, AmeriGas Propane, is the largest propane marketer in the U.S.
UGI’s current dividend yield, 6.0%, is more than double its typical yield over the past ten years.
Greif
Originally known as a barrel maker, Greif Inc. (GEF.B) now makes many kinds of industrial packaging, notably steel, fiber and plastic drums. Headquartered in Delaware, Ohio, Greif now operates in 36 countries.
After a few years of mediocre profitability, Greif has posted a strong return on equity (15% or better) in five of the past six years. The dividend yield is 4.5%, compared to a ten-year median of 3.3%.
I usually include in every column how the approach I’m writing about has done in past years. I can’t do that today, as this is the first time I’ve written about the strategy of buying stocks with dividend yields above their own historical average.
I’ll let you know in a year how the stocks discussed in today’s column panned out.
Disclosure: A hedge fund I manage holds call options on Walgreens Boots Alliance. In 2007-2011, when I ran a mutual fund (Dorfman Value Fund, later named Thunderstorm Value Fund), U.S. Bancorp served as the custodian and fund administrator.
John Dorfman is chairman of Dorfman Value Investments in Boston, Massachusetts. His firm or clients may own or trade the stocks discussed here. He can be reached at jdorfman@dorfmanvalue.com.