- AT&T (NYSE:T) - 5.11% Yield, 30 consecutive years of dividend increases
- Universal Health Trust (NYSE:UHT) - 5.86% Yield, 27 consecutive years of dividend increases
- HCP, Inc. (NYSE:HCP) - 5.32% Yield, 29 consecutive years of dividend increases
- Mercury General (NYSE:MCY) – 5.26% Yield, 28 consecutive years of dividend increases
These businesses have managed to grow their dividend payments without interruption for at least 2.5 decades. A long track record of success shows evidence of a competitive advantage. Demanding a successful history from your high yielding stocks helps insulate your investments from falling dividends, which defeat the purpose of high yield investing.
This article will give an overview of each business including its current events and growth prospects. Each business will be compared using the 5 Buy Rules from the 8 Rules of Dividend Investing to determine how these 4 high yielding stocks compare to other businesses with a long history of dividend payments.
AT&T provides telecommunications services to consumers and businesses primarily in the US. The company’s revenues are split between its Wireline Voice, Wireline Data & IT Solutions, and Wireless divisions. The company’s wireless division accounts for over half of the company’s revenue.
Source: AT&T 1st Quarter Investor Briefing
AT&T recently acquired DirectTV in a stock and cash transaction. The acquisition strengthens AT&T’s position as a content distribution leader across mobile, video, and broadband platforms. DirecTV will further give AT&T a foothold in the growing Latin American market as DirecTV is Latin America’s leading pay TV provider.
Source: AT&T Newsroom
Universal Health Trust Overview
Universal Health Trust is a REIT that focuses on healthcare related facilities. The trust was founded in 1986, and now has 56 investments in 16 states in the US. The company’s investments include hospitals, medical office buildings, behavioral healthcare facilities, and childcare centers. The bulk of the company’s properties are medical offices and clinics.
Source: UHT Investor Relations
The company’s growth is dependent upon the expanding health care sector. Universal Health Trust will likely continue to grow as the US population ages and requires more medical care. Health care has been expanding significantly faster than the overall. This trend is very likely to continue due to the aging US population, and higher health care expectations.
HCP, Inc. is a REIT that invests primarily in US health care properties. The Company's portfolio of assets is spread between the following 5 sectors: senior housing, post-acute/skilled nursing, life science, medical office and hospitals.
Source: HCP Investor Relations
HCP is among the best managed health care REITs available. The company’s growth drivers are similar to that of Universal Health Trust; the aging US population coupled with expanding health care expectations. In addition to growing through new property acquisitions, HCP has managed to grow operating income through contractually rent increases from same store sales growth. Same store sales growth has been above 3% each year since 2009.
Source: 2014 NAREIT Investor Presentation
Mercury General Overview
Mercury General is the leading independent broker and agency writer of automobile insurance in California. In addition to California, the company has expanded throughout much of the US. Mercury General also offers mechanical breakdown and homeowner’s insurance.
Source: Mercury General Investor Relations
Mercury General’s premium revenue reached its zenith in 2006. The company has not been able to achieve growth since that time due to overall competitiveness in the auto insurance industry and because the company has not been able to obtain price increase approval from California on a consistent basis.
Source: Mercury General 2013 Annual Report
If the company is going to return to strong growth, it will need to better manage its relationships with the state government of California. Mercury General has expanded throughout the US. Future growth will also be generated as the company enters new US markets.
Comparison 1: Dividend History
All four of these businesses have increased dividend for 25+ consecutive years. AT&T has increased its dividend payments for 30 consecutive years, HCP for 29, Mercury General for 28, and Universal Health Trust for 27. All four of these companies long dividend increase histories is evidence of sustainable competitive advantages.
Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.
Source: S&P 500 Dividend Aristocrats Factsheet, February 28 2014, page 2
Comparison 2: Dividend Yield
Universal Health Trust’s dividend yield of 5.86% is the highest out of 128 businesses with 25+ years of dividend increases without a reduction. HCP has the 2nd highest yield at 5.32%, followed by Mercury General at 5.26% and AT&T at 5.11%. The 4 businesses in this article are the 4 highest yielding businesses with 25+ years of dividend payments without a reduction.
Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.
Comparison 3: Payout Ratio
Due to the structural differences of REITS, their payout ratios are calculated with FFO instead of earrings. AT&T has the lowest payout ratio of the 4 at 53.69%, which ranks at 78 out of 128 busineses with 25+ years of dividend payments without a reduction.
HCP has a payout ratio of 79.30%, ranking as the 112th highest out of 128. Universal Health Trust has a payout ratio of 91.36% which gives it the 118th highest payout ratio out of 128 businesses with 25+ years of dividend payments without a reduction. Finally, Mercury General has a payout ratio of 114%, which is the 122nd highest out of 128.
Of the businesses listed above, AT&T and HCP are in no danger of reducing dividends. Universal Health Trust’s high payout ratio gives it little room for error for further dividend increases. Finally, Mercury General’s payout ratio is over 100%. The company will have to significantly grow earnings if it is going to avoid a dividend reduction.
Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.
Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3
Comparison 4: Growth Rate
The 10 year revenue per share growth rate for each company is listed below along with each company’s rank out of 128 businesses with 25+ years of dividend payments without a reduction:
- AT&T 4.02% per year, 71st highest out of 128
- HCP 2.94% per year, 92nd highest out of 128
- Universal Health Trust 2.51% per year, 97th highest out of 128
- Mercury General, -1.88 per year %, 119th highest out of 128
Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.
Source: Rising Dividends Fund, Oppenheimer, page 4
Comparison 5: Volatility
The long-term standard deviation for each company is listed below along with each company’s rank out of 128 businesses with 25+ years of dividend payments without a reduction:
- AT&T 22.30%, 31st lowest out of 128
- Mercury General, 28.00%%, 62nd lowest out of 128
- Universal Health Trust 34.41%, 92nd lowest out of 128
- HCP 41.25%, 116th lowest out of 128
Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.
The four businesses discussed in this article all have exceptionally high dividend yields. AT&T stands out quantitatively, as it has the highest revenue per share growth rate, lowest standard deviation, and lowest payout ratio of the four businesses reviewed in this article. AT&T is a Top 20 stock (out of 128) based on the 8 Rules of Dividend Investing. The other 3 businesses do not compare well to their peer dividend growth stocks due to slow growth rates and relatively high payout ratios, which offsets their high dividend yields.