It’s Been a Horrible Year for Dividend Investing
Posted: October 28, 2020
October 12, 2020 (Maple Hill Syndicate) – The past year was horrible for dividend investing.
Many investors these days are indifferent to dividends. They want a story, fast growth, momentum, and a whiff of technology. No one buys Netflix (NFLX) or Tesla Inc. (TSLA) for the dividends – and by the way, there aren’t any.
Beginning in 1998, I’ve written 20 columns recommending selected stocks that I think have dividend appeal. The one I wrote a year ago had the worst results, by far.
My Dividend Appeal picks dropped 42.3%, shattering the previous low, a loss of 15.4% in 2015-2016. All five of my picks fell, led by Carnival Corp. (CCL). The cruise ship operator fell 62% after Covid-19 turned some cruises into nightmares and forced the cancellation of future cruises.
The big loss in 2019-2020 leaves me just ahead of the Standard & Poor’s 500 Index in this series of columns. In 20 outings, my Divided Appeal stocks average a 12-month return of 10.1%, versus 9.8% for the S&P 500.
Bear in mind that my column results are hypothetical: They don’t reflect actual trades, trading costs or taxes. These results shouldn’t be confused with the performance of portfolios I manage for clients. Also, past performance doesn’t predict future results.
I won’t let one year’s disaster knock me off this horse. Over the decades, dividends have directly or indirectly accounted for about 40% of the stock market’s return. The dividends themselves account for about a quarter of the return, and the reinvestment of dividends accounts for 15% or so.
Most managements talk bullish, but rising dividends are a sincerity barometer. When a board of directors lifts the dividend, they probably believe that earnings progress is sustainable.
Here is a new batch of stocks that I believe have dividend appeal. Each has a dividend yield (stock price divided by the annual amount of the dividend) of 2.5% or better, and a dividend growth rate over the past five years of 7% per year or more.
Tyson Foods Inc. (TSN) produces beef, chicken and pork. Meat packers have been hard-hit by the Covid-19 pandemic, because employees typically work in close proximity. Tyson shares have slid from about $90 in January to about $58 now. A bottom? I don’t know, but I think it’s a decent buy point.
Tyson is a dividend star. For years, it paid 16 cents a share in dividends. It started to increase the dividend in 2013, and has increased it every year since, to a current $1.68 per share. Its dividend yield is 2.9%.
Intel Corp. (INTC) has increased its dividend in 14 of the past 15 years. The largest U.S. semiconductor manufacturer has grown its profits at almost a 17% annual clip the past five years.
Semiconductors are used in computers, smart phones, cars and even appliances. While most technology companies pay skimpy dividends, Intel offers a 2.5% dividend yield. And since it pays out only 24% of profits in dividends, I believe there is room for further increases.
Franklin Resources Inc. (BEN) is one of the largest U.S. mutual fund companies. Mutual funds have been losing market share to index funds, which is one reason why Franklin Resources shares go for a modest 11 times earnings.
I believe the trend toward index, or passive, investing has been overdone. (I may be biased, since I am an active manager myself.) With a dividend yield of 4.8%, I think Franklin Resources is a good buy now.
Selling below book value (corporate net worth per share) is WestRock Co. (WRK). Based in Atlanta, it’s one of the largest U.S. producers of containerboard and other packaging materials.
I figure that the containerboard business will benefit from the long-term trend towards consumers shopping online, instead of in stores. Online purchases need to be delivered, and the cardboard box is the canonical way of doing it.
Westrock shares yield 3.5%. The dividend is $1.59 a share, up from 41 cents a share in fiscal 2013.
Apogee Enterprises Inc. (APOG) makes glass for skyscrapers. I don’t know that the stock especially timely now, but I’ve always liked it. And it has dividend appeal, with a yield of 2.9% and a five-year dividend growth rate of close to 12%.
This month, Apogee announced it will resume a program of buying back its own stock. That program had been suspended in the spring when the pandemic hit.
Disclosure: Some of my dividend-oriented clients own Apogee Enterprises, Franklin Resources, Intel and Tyson Foods. I don’t own them personally.
John Dorfman is chairman of Dorfman Value Investments in Boston. His firm of clients may own or trade securities discussed in this column. He can be reached at email@example.com.