Top 10 Dividend Champions: Lowest Payout Ratios

The payout ratio is an often discussed metric for determining whether a dividend payer is a solid investment.  This is particularly true from a dividend growth perspective.

The premise of the argument is that a company paying most of its earnings in dividends doesn’t have room to increase its dividend payment going forward.  For instance, if a firm has net earnings of $3 per share per year and pays out $2.70 of those earnings in dividends, a 90% payout ratio, it has only $0.30 per year with which to increase dividend payments.

Danger?

Accordingly, investors should seek firms with low payout ratios.  Those firms have room to increase their dividends without consuming most of their earnings in the process.  The theory says investors are likely to see the dividend stream from that investment grow over time given the headroom afforded by the low payout ratio.

With that perspective in mind, the firms in the table below are the Top 10 Dividend Champions by Payout Ratio on 1.31.19.  All deliver 25+ year records of increasing dividend payments while carrying the lowest payout ratio among all Dividend Champions.

Company	Payout Ratio
Consolidated Edison	13.45
NACCO Industries	15.10
West Pharmaceutical Services	19.11
Black Hills Corp.	20.12
SEI Investments Company	20.95
Roper Technologies Inc.	21.07
Stepan Company	21.28
California Water Service	22.77
Nordson Corp.	23.18
Brown & Brown Inc.	23.19

Although this metric appears solid upon first glance, one should also look at the dividend yield.  It’s possible a firm with a low payout ratio is paying a low dividend as well.  A good exercise here would have been to drop another column to the right of the payout ratio in which to add the respective yields of the firms for comparison purposes.  Maybe next time.

Another item to keep in mind is that a firm with a low payout ratio and low dividend yield, ostensibly having room to grow its dividend, may never deliver a dividend stream as strong as that of an alternative firm already sporting a high dividend yield and high payout ratio.  See the post on Dividend Growth vs Dividend Yield for additional thoughts on this matter.

Buying a low payout ratio, low dividend stock might be considered the equivalent of paying several multiples above book value with the hope in both cases that actual results eventually meet expectations.  This can be a questionable proposition.  As a result, the Dividend Farmer prefers to buy a bird in hand rather than two in the bush.

In any event, looking for low payout ratio dividend payers is a popular screening method when hunting for dividend opportunities.  Your investing philosophy will help you determine whether or not emphasizing payout ratio is right for you.  Either way, it’s a metric to keep in mind when analyzing alternatives.

The thoughts and opinions expressed here are those of the author, who is not a financial professional.  Perspectives offered should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.

Top 10 Dividend Champions: Price to Book (P/B)

Price to Book Value

As Warren Buffet was quoted in the previous post:  Price is what you pay.  Value is what you get.

You might think of a firm’s Price to Book ratio in a similar manner.  Price is the money you pay per share.  Book Value may be thought of as the company’s net assets, if the company were liquidated, distributed to stock holders on a per share basis.

Let’s say you pay $100 a share for the stock of a company.  The next day the company is liquidated and the proceeds from the sale of all its assets are used to pay off its liabilities.  Whatever’s left is then divided among the shares outstanding, paid to the holders of record.  If the proceeds paid per share are $50 then the Price ($100) to Book ($50) ratio would be 2:1.

As you can see, you don’t want to pay much more than the book value of a firm as a hedge against the worst case scenario.  Ben Graham and Warrant Buffett advocated that value investors pay no more than twice the book value of a firm and preferably less than that.

What is the Price to Book Ratio?

If you can find a firm in which the price paid per share is less than the book value per share you’re essentially buying one dollar for a handful of pennies.  And if that company is paying a dividend, better yet a dividend that’s been growing every year, so much the better!

Below are the 10 Dividend Champions with the lowest P/B ratio as of 1.31.19.  As you can see, the top 3 firms were actually available for pennies on the dollar and have increased their dividends every single year for 25+ years!

Company	P / B
Telephone & Data Sys.	0.89
NACCO Industries	0.98
People's United Financial	0.98
Universal Corp.	1.09
Old Republic International	1.13
United Bankshares Inc.	1.13
First Financial Corp.	1.19
AT&T Inc.	1.19
Chubb Limited	1.21
Community Trust Banc.	1.31

As with other factors discussed here, here, here, and here, Price to Book should not be the only one you consider in deciding where to plant your seed money.  However, the best value investors in the world pay a great deal of attention the price they’re paying relative to the value they’re receiving.  A wise Dividend Farmer will do the same.

The thoughts and opinions expressed here are those of the author, who is not a financial professional.  Perspectives offered should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.

Top 10 Dividend Champions’ Price-to-Earnings Ratios

The price-to-earnings ratio (P/E) is an investment metric commonly used by investors to help determine whether or not the price they’re paying for a company represents a good value.  As Warren Buffett is oft quoted, “Price is what you pay.  Value is what you get.”

Know the difference between price and value.

Price-to-earnings can signal many things.  For instance, if the price per share is 40 or 50 times the current earnings per share of a firm, investors may take that information to mean the company is expected to grow its revenues quickly.  In other words, investors are paying for “promise”.

Conversely, a firm with a share price only 7 or 8 times current earnings per share can be viewed negatively.  Investors may presume the firm’s growth prospects to be negligible since the market isn’t willing to pay a far larger multiple for the promise of increasing future earnings. 

Since signs of growth get media attention and lots of “votes” in the market, investors often gravitate to stocks with high price-to-earnings multiples, increasing the demand, driving up the price, and widening the P/E ratio even further.  Stocks found in a cycle in which excess demand is driven by perception may be referred to as “over bought”.

To avoid paying too much for over bought shares, I prefer Dividend Champions.  In Dividend Farming the objective is to maximize the return while minimizing the risk; the risk of paying too much for an investment. 

Stocks with solid records of dividend growth aren’t usually equated with high growth companies in the context of stock valuation.  As a result, they’re not inclined to be over bought by institutions, momentum investors, day traders, and the like. 

Below are the 10 Dividend Champions with the lowest, generally best, P/E as of 1/31/19.

Company	P/E
Consolidated Edison	3.53
Black Hills Corp.	6.76
Old Republic International	7.22
NACCO Industries	7.80
Artesian Resources	8.49
Franklin Resources	9.20
Nucor Corp.	10.16
First Financial Corp.	11.42
Eaton Vance Corp.	11.64
Community Trust Banc.	12.12

Knowing Dividend Champions are less susceptible to trend induced price inflation than alternatives isn’t a cure-all by itself.  The P/E ratio is still one of several indicators of a company’s ability to be profitable in general.

 

Because price-to-earnings is a ratio it’s possible to have the ratio widen not because the stock is over-bought, but because the firm is struggling to generate earnings.  Mathematically you can increase the ratio by increasing the numerator (over-priced) while holding the denominator steady, or decreasing the denominator (poor earnings) while holding the numerator steady, or some combination of the two. 

Looking for firms with low P/E and other solid metrics, like length of dividend payments, debt-to-equity, and Price-to-Book, discussed in a future post, helps determine whether the price being asked for a particular issue represents a good value.

In the case of the 10 Dividend Champions with the best P/E ratio a true value investor will look beyond that metric alone before adding to his or her dividend farm.  However, filtering by Dividend Champion and rock solid P/E ratios is not a bad way to begin the selection process. 

With that said, be careful when looking at P/E.  Using the P/E based on the trailing twelve-month (TTM) earnings means the ratio is based on something akin to fact.  Alternatively, some investors are interested in the P/E incorporating earnings projections for the coming year. 

In my view using the forecast means my P/E decision criteria becomes one of shear speculation.  In the aviation industry it’s said good information leads to good decisions.  Speculation should not be mistaken for good information whether you’re flying airplanes or farming dividends.  Best practice suggests sticking with the TTM in the price-to-earnings calculation to help generate the margin of safety in your investment and keeping your Dividend Farm healthy and growing properly.

The thoughts and opinions expressed here are those of the author, who is not a financial professional.  Perspectives offered should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.

Top 10 Dividend Champions: Best Dividend Growers

10 Best Dividend Growers

It’s been said in business that a firm can’t cut its way to sustained profitability.  It’s also been said that if a firm’s not growing, it’s dying.  The universal truth of those statements may be debated.  What’s not debatable is actual, long-term performance.

Ben Graham’s rules for value investors focus on the selection of well established, conservatively financed firms.  Graham defines such firms as those with a record of paying dividends for more than 10 consecutive years, among other criteria. 

The Dividend Champions list provides a host of firms exceeding that criteria.  They are paying out dividends for more than twice as long as Graham recommends while increasing those payments annually.

Below is a list of firms having delivered the largest percentage growth in their dividend payments during the past decade.  This list was filtered from the Dividend Champions updated on 1.31.19.

Company	10-year Growth Rate %
Helmerich & Payne Inc.	31.0
A.O. Smith Corp.	19.9
Stryker Corp.	19.0
Roper Technologies Inc.	19.0
Lowe's Companies	18.4
Jack Henry & Associates	17.3
Cintas Corp.	16.1
Target Corp.	15.4
Computer Services Inc.	15.0
Hormel Foods Corp.	15.0

The top end of this range is the equivalent of seeing your annual pay for each of the past 10 years rise at a rate compounded at 31% during the period; effectively what Helmerich & Payne has done. 

Another way to think of it is to realize that if your annual pay started at $50,000 ten years ago it would be in the neighborhood of $65,000 to $70,000 today.  In the case of dividends, however, you don’t have to work at it.  It just happens.  This is the beauty of Dividend Farming.

The Top 10 Dividend Growers represent the upper end of the Dividend Champions club.  However, any firm throwing off dividends at an increasing rate for decades is an investment force to be taken seriously. 

Relative to firms paying steady or declining dividends, or none at all, the top Dividend Growers may represent the kind of high quality firms capable of delivering solid returns while minimizing investment risk.  Intelligent Investors and Dividend Farmers following Graham’s value investing lead are unlikely to be disappointed.

The thoughts and opinions expressed here are those of the author, who is not a financial professional.  Opinions provided should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.

Top 10 Highest Yield Dividend Champions

Highest Yielding Dividend Champions

A key objective in Dividend Farming is the development of a cash flow stream through dividend payments.  Strategically speaking, it’s important that dividend growth is compounded at a rate greater than inflation e.g., Consumer Price Index (CPI).  If not, the purchasing power of your cash flow erodes over time. 

Inflation beating compound growth may be achieved in several ways.  Investing in firms growing dividend payments quickly, acquiring companies with stable dividend yields greater than the CPI, or a combination of the two are all possible.

The table below highlights Dividend Champions with the 10 highest dividend yields among those raising their dividends for 25 or more years as of 1.31.19.  These data points are drawn from the DRIP Investing site which is a great place to begin looking for solid dividend paying firms that can help build an inflation besting dividend stream.

10 Highest Yielding Dividend Champions
Company	Yield	Dividend Payment
AT&T Inc.	6.79	$0.5100
Altria Group Inc.	6.48	$0.8000
Tanger Factory Outlet Centers	6.15	$0.3500
Universal Corp.	5.20	$0.7500
Urstadt Biddle Properties	5.14	$0.2750
Helmerich & Payne Inc.	5.07	$0.7100
Mercury General Corp.	4.85	$0.6275
ExxonMobil Corp.	4.48	$0.8200
People's United Financial	4.27	$0.1750
Chevron Corp.	4.15	$1.1900

Full disclosure note:  AT&T and Altria are both in my portfolio and have been for years. 

With that said, firms in this list deliver dividend yields above the 2018 Consumer Price Index (CPI) as reported by the U.S. Bureau of Labor Statistics.  The All Items Index for the 2018 12-month period was 1.6%.  This means the companies shown provided a range of dividend payments more than twice the inflation rate to nearly 6 times as great!  These companies have been growing their payments for more than a quarter century and it stands to reason based on the previous Top 10 post regarding Dividend Champions that the growth will continue.

As an investor you have many choices.  Among those are growth company investments in which investors hope the companies grow as forecast.  Alternatively, you can dive into large, solid firms that aren’t Wall Street darlings but reliably put cash in your pocket every quarter.  Those cash payments compound until you’re ready to use them producing an amazing crop for your future self and family.  When that happens, you may look back at your past self and say thanks for choosing to become a Dividend Farmer.

The thoughts and opinions expressed here are those of the author, who is not a financial professional.  Opinions provided should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.