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Ideas for Income Investors. High Dividend Stocks, Mutual Funds etc.
How to Find Safe Dividend Stocks in Gurus’ Portfolios (PAYX, INTC, PG, MDC)
Posted by: gurufocus (IP Logged)
Date: October 11, 2011 05:37PM
In dividend investing, one key factor investors should consider is the safety of the dividends. That is, whether the company can continue to pay the dividends. We have published plenty of articles about dividend stocks. We also developed a page of dividend stocks which is devoted to the high-dividend stocks in Gurus’ portfolios. These articles and pages can help you to find ideas for dividend stocks.
Another place to look for dividend stocks is to check into each Guru’s portfolio directly. Our GuruFolio Report drills into every aspect of each Gurus’ portfolio. The screen shot below shows where the link is to find the dividend yield stocks of Gurus.
The chart we displayed above is the stocks that have the highest dividend yield in Arnold van den Berg’s latest portfolio. The stocks that have the highest yield are home builder MDC Holdings (MDC), CDI Corp. (CDI), Paychex (PAYX), Penn Virginia (PVA), etc. Since it is extremely important in income investing to make sure the companies can continue to pay dividends, a simple way to filter out risky companies is to invest only in companies that have at least two-star predictability rank. Here is an example of why this is important.
Take a look at MDC, the company with the highest yield in Arnold van den Berg’s portfolio. The company is also close to the peak of its history of dividend yield. But MDC is ranked non-predictable according to GuruFocus' predictability rank. A brief look at the 10-year financials of MDC will tell us that the company lost money during three out of the last five years. The cash flow from operations was negative in the last year. Although cash in hand is enough to cover the debt, and the company is in fair financial health, it is unlikely that the company will increase its dividend before business starts to grow again. As a matter of fact, the company has not increased its dividends for the last five years. Here is the quarterly dividend history:
If we disregard all non-predictable companies in Arnold van den Berg’s portfolio, the companies with the highest dividend yields are Paychex (PAYX, yield 4.5%), Intel (INTC, yield 3.7%), Procter & Gamble (PG, yield 3.2%), UPS (Ups, yield 3.1%) and Emerson (EMR, yield 3%). These are all high-quality companies at greater than 3% dividend yield.
How safe are the dividends of these companies? What are the potentials of dividend growth? Checking out the history of the cash flow and the balance sheet will give us a very good idea. Here are some commentaries pn these companies:
Paychex (PAYX, yield 4.5%)
The economic downturn slowed down the growth of Paychex, the company that provides payroll services for small businesses. The company’s earnings had not grown materially over the past five years. Since the business does not need a lot of capital to grow, the company traditionally pays most of its earnings out in dividends. With slow growth in earnings and already high dividend payout, the dividends have not been increased since 2008.
Overall the company has a very strong balance sheet. It has more than $900 million in cash and no debt. Cash flow from operations is at about $700 million a year. Dividend payment costs about $450 million a year. It is safe to assume that the company’s dividend is safe, but the potential for dividend growth will depend on the overall performance of the economy.
Who would think that Intel became a dividend stock 10 years ago? But the stocks of the chipmaker now yield almost 4%. Over the past five years Intel consistently increased its dividend and it at 12% a year.
Even with two recessions in the last decade, Intel never stopped growing. Its revenue grew from $26 billion in 2001 and $48 billion in 2010. In the meantime, Intel used the cash to buy back shares and increase dividends. For the last 12 months, Intel paid 68 cents in dividends.
Intel operates in high profit margin and generated $16 billion of operating cash flow. This is far more than they need to invest in business. So the company has been acquiring smaller tech companies in service area. The latest acquisition is McAfee, the anti-virus company, for $7.86 billion. The acquisition was easily funded by the operating cash flow. Intel spent $3.7 billion to pay dividend last year. The dividend payout ratio is only about 30% of the earnings. With this low payout ratio we can safely assume that Intel will continue to raise its dividends, both from earnings growth and the increase of dividend payout.
The chart below is from the 10-year valuation page of Intel. We can see that Intel now has almost the highest dividend yield in its history:
Procter & Gamble (PG, yield 3.2%)
PG is one of the most predictable companies. The company grows its revenue and earnings at a quite predictable 4% a year. It pays out about 40% of its earnings in dividends. The dividend growth rate is about 11% a year. Please see the chart below:
Procter & Gamble has also been aggressively buying back shares. This reduces the cash they need to pay dividends. Net sales increased 10% in the latest quarter to $20.9 billion, bringing the total for the year to $82.6 billion, up 5% compared to 2010. Organic sales, which exclude acquisitions, divestitures and foreign exchange, grew 5% in the quarter and 4% for the year (roughly 1% ahead of underlying market growth rates). As noted by CFO Jon Moeller, “The growth was broad-based with increases in 5 of 6 reporting segments, 21 of 24 billion-dollar brands and 15 of our top 17 countries.”
In summary, when we look for high-dividend-yield stocks in Gurus’ portfolios, GuruFocus Predictability Rank can serve as a great screen for filtering out risky companies. Buying high-yield predictable companies can significantly reduce the risk of losing investing principle. You can check out the safe dividend stocks on Warren Buffett’s portfolio by checking out this link.
Stocks Discussed: PAYX, INTC, PG, MDC, RDI, PVA,