Stick with the Dividend Veterans

03/13/2012 11:33 am EST

Focus: INCOME

Kelley Wright

Managing Editor, Investment Quality Trends

Many companies are hiking dividends, and those with a long track record of rising payouts are the safest bets, says Kelley Wright, managing editor of Investment Quality Trends.

My guest is Kelley Wright and we’re talking about all of the cash hoards that businesses have been keeping aside. What’s the number now? It’s like $2 trillion? $3 trillion that corporations have?

It’s big. It’s big. There’s a bunch of commas and zeros.

So what are they doing? I know that a lot of companies are starting to pay dividends and a lot of companies are starting to increase their dividends. But when is this cash actually going to turn into something for the investor who’s looking for stock appreciation?

Sure. Well, there are a couple of things going on, in my humble opinion.

A lot of companies are hoarding cash. They’ve gotten lean and they’ve gotten mean and they’ve stripped down. Their productivity has not suffered, so there is really no reason for them to go out and make big capital expenditures.

So they’re piling up cash. Some of them are feeling pressure, though, to do something with it, and they don’t necessarily want to hire.

Which is what everyone wants them to do.

Which is exactly what everyone wants them to do. But that’s a long-term capital outlay and they’re just not feeling certain. So, in the meantime, they’ve got to do something with it, and what are really attractive are dividends.

OK, now, a lot of these companies have had long-term track records. So this is not a big deal for them. They’re not getting outsized. But you’ve got some of the “me toos" now that are showing up.

So if investors are trying to decide, one of the things that we say is look for a company where this is a policy. This is something they’ve done for decades and decades. They’re probably going to be a little bit more dependable and easier to evaluate than just some Johnny-come-lately who has decided, oh me too.

So what do you think about the companies that pay extraordinarily high dividends, like some of the mortgage REITs for example, 19%, I can think of one off the top of my head. Do you typically stay away from companies like that?
We do, because those aren’t really operating earnings, so that’s a horse of a different color.

You know, we’re usually working with companies that have traditional blue chips, the industrials and the utilities, because those are traditional operating earnings. They're a little bit more dependable than some of these new-fangled things.

I think some of that is return of capital. Sometimes it’s capital gains, it’s some of this and some of that, and it’s kind of hard to flesh out.

It’s tough to evaluate.

Very hard. I don’t know how. So I think to a degree, there is kind of a speculation going on there.

It’s a thing with the MLPs. Now, those we understand, those are toll roads. Now that’s a little bit simpler and that’s a little bit easier to understand. The problem for us is that none of them have paid dividends long enough. Now we can look at their parent, and maybe use that as a proxy.

But there are a few exceptions. I mean, I can think of an MLP that was sort of grandfathered into the MLP thing, the Cedar Fair Fund (FUN). And they’ve been paying consistently strong dividends.

That’s true.

But they are an exception to the rule.

Obviously, the key is to find that.

Related Reading:

Related Articles on INCOME