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Dividends 101 - Not All Dividends Are Created Equal

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April 12, 2010 – Comments (12) | RELATED TICKERS: HCBK , BMS , RPM

Dividends 101 – Not All Dividends Are Created Equal

 

After receiving numerous requests to disclose what companies I would recommend holding for the long-term I developed the UltraRetirement portfolio. After that portfolio was filled with 190 stocks I received an even greater amount of requests to disclose what the best picks from that portfolio would be, sort of a never-ending spiral of “what should I buy?” With that I’ve decided to create a who’s who of the dividend paying world because not all dividends are created equal. I once again will supply the Motley Fool world with companies that I feel best represent the following categories but I must advise as usual that I’m in no way twisting your arm to buy into any of these stocks and you need to do your own research and not trust my ramblings as the word of God.

 

The following categories are only my interpretations of where some of these companies fall. That is to say that the steady dividend payers could also see rapid price appreciation as well, but that isn’t my main purpose in purchasing them, collecting the dividend is! Whereas from other companies here I expect solid underlying price moves and a smaller but decent dividend.

 

Below I will present a concise case as to why I perceive each company to be perfect for their category and use my own personal estimates to extrapolate out what I feel will be their complete decade-long return on investment. Remember, these are “guestimates,” not in the wool facts.

 

Companies that treat their investor’s right (a.k.a. Mr. Steady Increase)

 

Pitney Bowes (NYSE: PBI)

 

Pitney Bowes provides mail processing equipment and solutions. Pitney Bowes has been consistently profitable over the years, churning price to earnings ratios commonly around 9-12. Looking forward growth rates are a very sluggish 1%-2% and usually the story would end right there, that is until you take a closer look at how they treat their shareholders. Pitney Bowes has been one of the progenitors of consistency, having paid out a quarterly dividend to shareholders since February of 1982. Not only that, but Pitney Bowes has increased that dividend per share in each successive year with one quarterly blip in the economic collapse of 2007. From 2.5 cents per share they now pay 36.5 cents per quarter for a current dividend yield of 5.91%. Extrapolating out my projected 10 year stock price targets, and their average rate of dividend increases, I would project that a decade long hold would generate a return of 135%.

 

RPM International (NYSE: RPM)

 

RPM International engages in the manufacture, marketing and selling of specialty chemical products to industrial and consumer markets worldwide. Despite the economic maelstrom of the past three years RPM has managed to stay profitable while growing shareholder equity every year. Long-term growth rates with RPM fall somewhere in the 11%-13% range and they are currently trading at only 13 times 2011’s figures for a relatively inexpensive 0.9-1.0 forward PEG ratio. What is even more exciting is how well RPM appreciates their shareholders. They have paid out a dividend quarterly since October 1990 and have raised the dividend yearly ever since. In 1990 you’d take home 6.24 cents per share whereas you’ll pocket 20.5 cents per share now for a current dividend yield of 3.82%. Extrapolating out my projected 10 year stock price targets, and their average rate of dividend increases, I would project that a decade long hold would generate a return of 95%.

 

Health Care Properties (NYSE: HCP)

 

Health Care Properties Investors operates as a real estate investment trust investing in health care related properties and providing mortgage financing on health care facilities. Yes, you read that correctly, a REIT. Health Care Properties has been a model of consistency in the REIT space growing shareholder value year after year and staying solidly profitable. They boast a long-term growth rate of 5% and are currently trading at 15 times 2011’s figures but do keep in mind they these profits come with a lot of baggage, namely 5.6 billion dollars in long-term debts. Looking at their dividend payout history you’ll see an impressive jump in payments on an almost yearly basis since February 1988. In 1988 you would have received a dividend check for 16 cents for every share owned. Now you’ll receive 46.5 cents for every share owned for a current dividend yield of 5.59%. Extrapolating out my projected 10 year stock price targets, and their average rate of dividend increases, I would project that a decade long hold would generate a return of 100%.

 

Alliance Resource Partners (NASD: ARLP)

 

Alliance Resource Partners engages in the production and marketing of coal for utilities and industrial users in the US. Alliance Resource has seen consistent revenue growth in the wake of a slow economy and it has translated into solid profit potential. Stockholder equity has remained relatively stable despite weaker coal prices and their long-term growth rate looks impressive at 6%-7%. Currently ARLP is trading at under 10 times 2011 earnings for a forward PEG of approximately 1.4. Alliance Resource has had a steady to increasing dividend ever since its inception in October 1999 at 11.5 cents per share. Now ARLP boasts a dividend payout of 77.5 cents per quarter for a current dividend yield of 6.80%. Extrapolating out my projected 10 year stock price targets, and their average rate of dividend increases, I would project that a decade long hold would generate a return of 165%.

 

Oneok Partners (NYSE: OKS)

 

Oneok Partners engages in the gathering, processing, storage and transportation of natural gas in the United States. Oneok was one of the very first companies I discovered in the early 2000’s that paid a consistently high dividend and complemented this dividend with outstanding equity growth and not much has changed since. Oneok is still growing at 4.5% per year, trading at just 16 times 2011’s figures, two times book value and increases shareholder equity every year; a model of consistency. They have also been no slouch in paying out a sizeable dividend since January 1994 and never lowering their dividend. Back then you would have received 55 cents for every share you owned. Today you’ll receive $1.10 per share for a current yield of 6.91%. Extrapolating out my projected 10 year stock price targets, and their average rate of dividend increase, I would project that a decade long hold would generate a return of 165%.

 

First Energy Corp.  (NYSE: FE)

 

First Energy Corp. operates as a diversified energy company including the transmission, generation and distribution of electricity as well as energy management services. First off First Energy is buying another favorite of mine, Allegheny Energy which should create a very strong entity. First Energy is already trading at only 1.4 times book value with a long-term growth rate near 4% and a forward price to earnings under 10. This is a company that will turn you a profit regardless of the actions in the market and yet they also know how to take care of their investors. FE has been paying out a solid dividend since February 1998 and has increased it a few times since. Back then you’d have received 37.5 cents per share owned, now you’ll take home 55 cents per share for a current yield of 5.56%. Extrapolating out my projected 10 year stock price targets, and their average rate of dividend increases, I would project that a decade long hold would generate a return of 150%.

 

Bristol Myers Squibb (NYSE: BMY)

 

Bristol Myers Squibb, a global biopharmaceutical company, engages in discovering, developing, and delivering medicines that focus on unmet medical needs. Bristol Myers Squibb meets my criteria for owning medical/healthcare companies going forward and looks to capitalize on a long-term growth rate of 4%-5% per year. Bristol Myers already has 2.2 billion dollars in net cash and has grown shareholder equity by over 40% the past three years, so it’s future does indeed look bright. Also shining has been their stellar dividend performance over the years. Paying out a dividend regularly since March of 1977 (yes over 33 years), Bristol Myers has never had a dividend payment decrease. You would have received 1.719 cents per share back in 1977 whereas now you’ll pocket 32 cents per share owned for a current yield of 4.88%. Extrapolating out my projected 10 year stock price targets, and their average rate of dividend increases, I would project that a decade long hold would generate a return of 135%.

 

TC Pipelines (NASD: TCLP)

 

TC Pipelines, together with its subsidiaries, transports natural gas in the United States, eastern Canada and Mexico. Are you noticing a trend with natural gas pipelines and companies that take care of their shareholders? TC Pipelines has been consistently profitable but their revenues and amount of profit can indeed be all over the map as they are still a relatively “young” company in comparison to the sector. TC Pipelines is trading at 1.65 times book and 16 times 2011’s figures while boasting a long-term growth rate of 5% and growing shareholder equity by 20% over the past three years. They may have their hiccups, but they continue to treat shareholders well as is evidenced by their ever-increasing dividends paid out since January 2000. Back then a share of TC Pipelines would have delivered 45 cents per share, whereas today you will receive a check for 73 cents for every share owned for a current yield of 7.53%. Extrapolating out my projected 10 year stock price targets, and their average rate of dividend increases, I would project that a decade long hold would generate a return of 110%.

 

Companies with so-so dividends that have the potential for solid price appreciation

 

Conoco Phillips (NYSE: COP)

 

Conoco Phillips operates as an integrated energy company worldwide in six segments: Exploration and Production, Midstream, Refining and Marketing, LukOil Investment, Chemicals, and Emerging Businesses. Despite some of the rock solid investments on this list, I’m pretty sure Conoco Phillips is my absolute favorite. There is no better company out there to take advantage of rising energy fuel prices than Conoco. They are currently trading at a mere 7 times 2011’s estimates with a long-term growth rate of over 13%, which is phenomenal for a company its size. What is even more phenomenal is the dividend that has been regularly paid out by COP since February of 1982. Unlike the few companies mentioned above Conoco did lower their dividend in the mid to late 1980s but has consistently raised it since 1990. Back in 1982 you’d have been graced with a 9.166 cent dividend per share owned while now you’ll receive a 50 cent per share stipend just for owning Conoco for a current yield of 3.62%. Extrapolating out my projected 10 year stock price targets, and their average rate of dividend increases, I would project that a decade long hold would generate a return of 150%.

 

First BanCorp of Maine (NASD: FNLC)

 

First BanCorp operates as a holding company for The First, which provides banking services primarily for small businesses and individual in the United States. I know, don’t get your panties in a bunch, it’s really a bank on this list! First BanCorp currently boasts a price to book of a meager 1.23 with a long-term growth rate near 5% and decent near-term profitability targets. Trading at just 12 times 2011’s projections and having grown shareholder equity by almost 25% over the past three years despite a poor economy this is the type of bank I could get behind. What I haven’t mentioned is the steadily rising dividend which needed a global collapse to simply level it off. Back when First BanCorp first paid a dividend in September of 1999 you would have received 4.333 cents per share whereas now you’ll receive a clean 19.5 cents per share for a current yield of 4.96%. Extrapolating out my projected 10 year stock price targets, and their average rate of dividend increases, I would project that a decade long hold would generate a return of 130%.

 

Hudson City BanCorp (NASD: HCBK)

 

Hudson City BanCorp operates as the bank holding company for Hudson City Savings Bank that provides a range of retail banking services. Holy crap, the world is coming to an end, two banks in a row, I know! How the hell do you increase revenues, tangible assets, total stockholder equity, profits and your dividend in the face of economic turmoil? Just ask Hudson City BanCorp, hands down the best bank in existence and the only “go-to” bank in my opinion. Every metric here is going in the correct direction and should translate into a marked price appreciation over the coming decade. Not to be forgotten however is the fact that Hudson City has been paying out a growing dividend ever since November 1999 when they offered a 0.78 cent dividend, not even a full penny. That seed has grown now into a 15 cent quarterly dividend that puts the current yield at 4.16%. Extrapolating out my projected 10 year stock price targets, and their average rate of dividend increase, I would project that a decade long hold would generate a return of 175%.

 

Comfort Systems (NYSE: FIX)

 

Comfort Systems USA provides installation, maintenance, repair and replacement services for heating, ventilation and air conditioning systems in the mechanical services industry in the US. Comfort Systems simply doesn’t have to worry about a lack of work in their line of business and it shows with a projected 6% long-term growth rate and 121 million dollars in net cash. This is a conservative yet well-run business which has only recently begun to benefit from that approach. Recently we’ve seen shareholder equity tick up by a steady 6%-7% per year. We also have seen the sprouting of what could become a very solid dividend in the future. Comfort Systems started paying out a dividend in November 2005 at 2.5 cents per share. Less than five years later that amount has doubled to 5 cents per share and a current yield of 1.55%. Extrapolating out my projected 10 year stock price targets, and their average rate of dividend increase, I would project that a decade long hold would generate a return of 105%.

 

Bemis Corp. (NYSE: BMS)

 

Bemis Company manufactures and sells flexible packaging products and pressure sensitive materials in the US, Canada, Mexico, South America, Europe and Asia. Bemis has long been a model of consistency in terms of growing shareholder equity by an average of 5-10% per year and trading at somewhere between 12-15 times forward earnings with a long-term growth rate of 7%-8%. What is truly astounding about Bemis, and what makes them perhaps the best example of a dividend paying company that takes care of its investors, is Bemis has paid a dividend since August 1985 and has raised it every…single… year since then! What started out as a 1.562 cent dividend has ballooned into a 23 cent per share dividend today for a current yield 3.08%. Any smart investors looking for a Roth IRA play needs to consider Bemis! Extrapolating out my projected 10 year stock price targets, and their average rate of dividend increase, I would project that a decade long hold would generate a return of 110%.

 

Holly Corp. (NYSE: HOC)

 

Holly Corp. together with its subsidiaries operates as a petroleum refiner in the United States, and we all remember how much I like refiners! Unlike most refiners over the last three years, Holly Corp has been able to remain wholly profitable while still sporting a long-term growth rate well in excess of 20% at the moment. Shareholder equity is growing at about 3-4% per year and it appears as if their dividend payout could be something special in the future. Holly has been paying a dividend consistently since March of 1992 when it was just 0.937 cents per share, not even a full penny. Now you can expect to receive 15 cents per share owned for a current yield of 2.21%. Extrapolating out my projected 10 year stock price targets, and their average rate of dividend increase, I would project that a decade long hold would generate a return of 160%.

 

Companies with stellar dividends if you can catch them at the right time

 

Frontline (NYSE: FRO)

 

Frontline, through its subsidiaries engages in the ownership and operation of oil tankers and oil/bulk/ore carriers. Let’s face it, crude oil, coal and iron ore need to get to their destinations somehow and Frontline continues to be the only tanker outside of Tidewater that can turn a profit with any remote consistency. The concerns I have with Frontline stems from their heavy debt leverage which could potentially cripple future growth. Disregarding a long-term outlook on Frontline and simply sticking to what we know, Frontline will produce absolutely killer returns when oil prices heat up. It is absolutely possible that $110 oil could produce over $8 per share in dividends. Frontline’s history shows yields that have been as low as 2% and as high as 29% over the past decade, making it hest example of a company to buy when times are good for the tankers and oil in general. Keep in mind this isn’t a recommendation to buy by any means, but merely a notification that FRO pays out a better than expected dividend when times are in its favor.

 

Diamond Offshore (NYSE: DO)

 

Diamond Offshore Drilling operates as an offshore oil and gas drilling contractor worldwide. Diamond Offshore doesn’t need record oil prices to drive up shareholder equity as has been evidenced by the 30% jump over the past three years. They are trading at a mere 10 times 2011’s projections and their long-term growth rate of 12%-13% leaves them with a forward PEG ratio under 1. This is one that I feel could be a great dividend payer and capital appreciator if the time is right, and right now just might be that time. Diamond Offshore definitely has periods of increased profitability and rapidly rising oil prices tend to exacerbate those periods and thus their dividend payouts. Currently DO is yielding 8.82% and it has been paying out a considerably higher dividend since 2007. It is perfectly possible for DO to pay out up to $3.25 per share in quarterly dividends if oil sustains itself over $110 for a couple of years, putting DO in a potentially sweet spot to offer investors a 10% or higher return on dividends alone. I think it makes a better play than Frontline, but both should be monitored for their special circumstances.

 

UltraLong

12 Comments – Post Your Own

#1) On April 12, 2010 at 6:22 AM, Counterparty (< 20) wrote:

Nice one, very informative. Have & will be keeping an eye on COP (among others).

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#2) On April 12, 2010 at 10:09 AM, Option1307 (29.90) wrote:

Informative as usual, thanks!

I'm a little surprised AstraZeneca wasn't at/near the top of your list, I figured it would have fit nicely into the first or second category. Just goes to show what I know, ha!

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#3) On April 12, 2010 at 10:34 AM, ocsurf (< 20) wrote:

Good information. Thanks for doing this research Ultra.

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#4) On April 12, 2010 at 1:47 PM, lh100 (30.85) wrote:

thanks, great stuff.

 

About DO, I am probably missing something, but their last dividend is 13 cents, which on a yearly basis is not even 1% yield. Did something change, or is it temporary? Before that, they gave 1.88 $ per quarter.

 

 

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#5) On April 12, 2010 at 1:55 PM, blake303 (29.54) wrote:

Most of DO's dividends are classified as special dividends, which do not appear in yield calculations at most financial and brokerage websites. 

http://www.diamondoffshore.com/investors/investors_dividend.php 

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#6) On April 12, 2010 at 2:05 PM, JimBobbly (< 20) wrote:

Excellent research yet again, ty

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#7) On April 12, 2010 at 5:56 PM, SockMarket (63.07) wrote:

UL,

good post. Maybe you can explain something to me. Why would anyone buy a stock with a 2-4% yield that is growing quickly as oppose to something with a 6-10% yield that is growing slowly. It strikes me as someone saying "I would rather make $20K a year and get 25% raises than make $100K a year with 1% raises."

Sure, after 12-15 years at current growth rates the total dividend income from the fast grower will usually pass what you would get with the slower growing company but that expects that the growth rate remains the same, which I doubt any quickly growing company could keep up for this length of time. 

Also I would caution you on FE, yes the dividend looks nice and they have done well in the last 1/2 decade but their management appears to be a bit dull. I say this because they overpaid pretty heavily for AYE (no margin of safety based on AYE's 2009 EPS). Also AYE's earnings haven't touched 2003 levels for a while now, the stock hasen't appreciated in 25 years and earnings fluctuate wildly. What do you like about them?

 

One last thing: what do you think of PGN. I like them. 6% yield isn't bad and the do raise the divend. Back when I was born (not very long ago) they were paying $0.41 every quarter. now they pay $0.62 every three months.

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#8) On April 12, 2010 at 9:11 PM, JestYourFool (< 20) wrote:

Thank you, again, Ultra, for providing such great information. 

Jest

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#9) On April 12, 2010 at 10:53 PM, pastordisaster (< 20) wrote:

Outstanding. Thank you kind sir.

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#10) On April 20, 2010 at 6:23 PM, TigerPack1 (99.02) wrote:

UltraLong may not be the best name for your player currently!!! LOL

I can transition out of some of my index shorts in WSS, if you want to add more of your favorite small company short sale ideas you are successfully red-thumbing on CAPS.

There would be at least two benefits - One, I could buy more "longs" to net out the whole account's market exposure at a slightly higher level.  Two, your returns and picks would be a better and likely more profitable overall test than the plain vanilla double ETFs.

Email me about this idea if you are interested.

-TigerPack

 

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#11) On May 03, 2010 at 2:28 AM, Mstinterestinman (26.98) wrote:

How do you feel about BP? It has a little more yield than conoco and and a nice collection of reserves as well.

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#12) On May 03, 2010 at 2:31 AM, TMFUltraLong (99.96) wrote:

ozzfan1316,

Conoco offers significantly better price appreciation potential and trades at a significant discount to its peers and is thus my preferred choice in the sector.

UltraLong

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