The past two years have been rough for dividend-paying stocks. Investors kept expecting the Federal Reserve to hike interest rates any minute. The mere threat of rate increases hurt dividend-paying stocks, which compete for investors’ money with fixed-income vehicles such as bonds and bank certificates.
In the long run, however, dividends are an advantage, not a disadvantage. A study of returns from 1928 through 2013 by Kenneth French of and colleagues from University of Chicago found that dividend-paying stocks offer total returns about two percentage points better than nondividend payers.
Triumphs and tragedies
When I look for stocks with dividend appeal, I want to see an above-average dividend yield and also above-average dividend growth.
I have published 15 columns recommending stocks that have dividend appeal, beginning in 1998. Overall, the record has been pleasing. Of the 15 lists, 13 have been profitable and 10 have beaten the Standard & Poor’s 500 Index. The average one-year return on my recommendations has been 16.2%, compared to 8.7% for the S&P 500.
Keep in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Past performance doesn’t predict future results. And the returns from my column picks shouldn’t be confused with the performance I obtain for clients on actual managed portfolios.
My list from a year ago flopped. I didn’t foresee the big decline in the price of raw materials such as coal and iron, that caused BHP Billiton (BHP, Financial) to drop 27%. Other losers I recommended were Mattel Inc. (MAT, Financial) and China Yuchai International Ltd. (CYD, Financial). Overall, my picks from a year ago declined almost 11%, while the S&P 500 advanced 9.5%.
I hope to get back on track. Here are five new selections that have dividend appeal and are also attractive in other ways.
Chevron
I don’t believe the decline in the energy industry is over yet (despite a bounce the past couple or weeks), but Chevron Corp. (CVX, Financial) looks to me like a relatively safe bet. It’s a huge, stable company and should be able to acquire troubled competitors in this downturn. Its dividend yield is 4.8%, and it sells for 14 times recently depressed earnings. I suggest taking a half position now and half in about three months.
HCI Group
HCI Group Inc. (HCI, Financial) is the fourth-largest property and casualty insurance company in Florida. Investors, when they think of Florida, think of hurricanes. Naturally, that makes them skittish about Florida-based insurance companies. I believe that the consensus opinion is too bearish on HCI. It has a reasonably consistent history of earnings growth, offers a 3% dividend yield and has increased its dividend at roughly a 30%-a-year clip. While it is vulnerable to storms, it lays off excess risk on 27 different reinsurance companies with whom it works.
GameStop
GameStop Corp. (GME, Financial) sells used and new video games and game equipment, in large part to young men in their teens and twenties. People perceive the business as faddish and therefore fragile. But GameStop’s results argue otherwise. It has shown a profit in 13 of the past 15 years and has grown its book value (corporate net worth per share) at a 13% pace over the past decade. The big threat, of course, is that gamers will in the future get all their games online, and not need disks or special equipment. That may happen someday, but GameStop earned a 19% return on stockholders’ equity in the past 12 months. The dividend yield is 3.2%.
Cal-Maine
Cal-Maine Foods Inc. (CALM, Financial), the largest U.S. egg producer, has a large number of short sellers betting on it to decline. I believe their reasoning is that the current outbreak of bird flu is pushing up the cost of production. However, the shorts will not prevail because Cal-Maine has been able to pass the increased costs on to consumers.
Cal-Maine has a strong balance sheet with debt less than 6% of stockholders’ equity. The dividend yield is now north of 7%.
China Yuchai
Finally, as a high-risk speculation, I again recommend China Yuchai International. The company makes diesel engines and natural gas engines. It also does engine repair, owns hotels and engages in real estate development. It is risky for several reasons. Being in China alone is a risk factor. In addition, the Singapore-based company sometimes has a testy relationship with its mainland manufacturing affiliate. But the dividend appeal is undeniable. The stock currently offers an 8.4% dividend yield and the company has increased the dividend at a 32% annual rate in recent years.
