Quick Ideas

I recently published an article on Seeking Alpha outlining seven sin stocks with substantial dividend yields.

Two of them are alcoholic beverage companies which I’ve already published analysis articles on, and the other five are some of the world’s largest tobacco companies. The thing that these companies all have in common is that they generate tons of free cash flow because their products require little capital expenditure or new innovation, and sell reliably year after year. Free cash flow means plenty of capital to return to shareholders.

I personally don’t invest in tobacco companies, but for those that do, the article may be of use. It can be found here:
Seven Sin Stocks with Heavenly Dividend Yields

If you’re looking to boost the total dividend yield of your portfolio, picking up a few stocks yielding 4%, 5%, or 6% can go a long way. One must be careful, of course, to select companies that have sustainable dividend payouts and that are good long-term investments. Although not every one of these may make for a good investment, and readers should do their own more thorough research, here are six high-yielding companies that are worth being aware of.

Altria Group (MO)

Altria is one of the largest tobacco companies in the world, and also has an interest in alcoholic beverages. Depending on the individual investors views on ethical investing, it may or may not meet your requirements for inclusion in your portfolio, but the dividend yield is particularly high. There have been threats to the tobacco industry in many countries including the US for quite a while, and the uncertainty has kept stock valuations quite low. Coupled with the high dividend yields, tobacco investors that have reinvested their dividends have absolutely crushed the market over the last few decades. With a market capitalization of over $50 billion, Altria is the market leader in the United States. A key downside to this stock is Altria’s balance sheet. With a fairly high debt/equity ratio, a moderately low (but very stable) interest coverage ratio, and goodwill that approximately equals shareholder equity, Altria’s balance sheet leaves a lot to be desired. This is partially offset by the consistency of sales and profits, but worth taking into consideration when investing.

Dividend Yield: 6.30%
Latest Annual Dividend Increase: 10%
Payout Ratio: 80%
Total Debt/Equity Ratio: 2.37

CenturyLink (CTL)

CenturyLink, created after the acquisition of EMBARQ by CenturyTel, is an integrated communications company with significant operations in the heartland of the United States. The dividend yield has decreased a bit in recent months due to a significant stock rally, but the yield is still quite significant. The high payout ratio makes the dividend a little bit risky, and limits dividend growth. This is typical in this industry, however, and the consistent operations help keep the dividend stable. CenturyLink, like the previously mentioned stock, has a balance sheet that is stable but not particularly appealing.

Dividend Yield: 6.50%
Latest Annual Dividend Increase: 4%
Payout Ratio: 91%
Total Debt/Equity Ratio: 0.79

Allete (ALE)

Allete operates in both the energy and real estate industries. The company has significant leverage, but this is to be expected from a utility, and the stock trades at a lower P/B ratio than many other utilities. The utility portion of this company operates mainly in the US Midwest, and they have significant and growing renewable energy sources in the form of wind and hydro power. The company has a significant amount of real estate in Florida, and intends to sell at reasonable prices. A strike against ALE is that the company did not increase the dividend in 2010 over 2009.

Dividend Yield: 4.70%
Latest Annual Dividend Increase: 0%
Payout Ratio: 74%
Total Debt/Equity Ratio: 0.81

Leggett and Platt (LEG)

Leggett and Platt is a diversified designer and manufacturer of engineered components for a variety of industries. The balance sheet for the company is mediocre. The valuation and payout ratio are a bit high, but that is partly due to the cyclical nature of the company. As the economy recovers, continued rebound is expected by analysis forecasts. The good news for the company is that it generates extremely impressive cash flows, and in particular, a very healthy level of free cash flow in comparison to their net earnings. This allows the company to not only offer a significant dividend yield, but also to spend a considerable amount of money on share repurchases which fuel dividend growth.

Dividend Yield: 4.70%
Latest Annual Dividend Increase: 4%
Payout Ratio: 90%
Total Debt/Equity Ratio: 0.56

The Southern Company (SO)

The Southern Company is an electrical utility operating in Alabama, Florida, Georgia, and Mississippi. SO provides a recession-resistant and substantial dividend to potential investors. Downsides of the company include a weak balance sheet (but fair for a utility), and weak free cash flow. The dividend growth rate is significant considering the yield, and so the combined dividend yield and dividend growth rate is fairly attractive. I do find utilities, as a group, to be fairly expensive in the current market.

Dividend Yield: 4.80%
Latest Annual Dividend Increase: 4%
Payout Ratio: 73%
Total Debt/Equity Ratio: 1.07

Lockheed Martin (LMT)

Based on the recently increased dividend and the continually decreasing stock valuation, this large defense and aerospace company now offers a dividend yield in excess of 4%. Revenue, earnings, and cash flow have all performed strongly during the recession. Free cash flow is substantial, and enough to support the significant dividend payout. Unfortunately, like many companies on this list, Lockheed Martin has a balance sheet with a fairly large amount of debt, and goodwill that greatly exceeds shareholder equity. The interest coverage ratio, however, is higher than one might expect, and that’s a sign of stability. The low valuation, substantial dividend growth and yield (even with a low payout ratio), may make this stock reasonably attractive despite the shortcoming of the balance sheet.

Dividend Yield: 4.00%
Latest Annual Dividend Increase: 20%
Payout Ratio: 34%
Total Debt/Equity Ratio: 1.28

Full Disclosure: At the time of this writing, I do not own shares of any of the companies mentioned.
You can see my full list of individual holdings here.

In the spirit of the holiday season, here’s a list of the major dividend stocks that market fun products to children and families.

Hasbro (HAS)

Hasbro gets the first mention on this list due to its dividend growth and overall quality. The company is more than just a toymaker; it’s a character and brand company. Hasbro owns several memorable and well-known characters and brands, including Transformers and G.I. Joe. The company also owns both Milton Bradley and Parker Brothers games (Monopoly, Scrabble, Risk, Trivial Pursuit, Battleship, Twister, etc.), Nerf, Wizards of the Coast, Plah-Doh, My Little Pony, and much more. Hasbro has got a lot going for it, although its debt load is a bit higher than I’d like to see. Hasbro has been effectively using movies and electronic media to keep its products relevant. The cycle of toys selling movies and movies selling more toys is an enviable position.

Brand names provide a solid economic moat. The top board games are known in many places around the world, and their content can be licensed to electronic media companies in addition to being sold as physical games. GI Joe and particularly Transformers have brought millions of people to the movies. Wizards of the Coast produces products like Dungeons and Dragons, Magic the Gathering, and other role playing and trading card games.

Dividend Yield: 2.08%
Latest Dividend Increase: 25%
Market Capitalization: $6.6 billion

The Walt Disney Company (DIS)

Disney is the ultimate character company. Spanning the better part of a century, Disney has been in the business of spreading happiness to children while accumulating considerable criticism along the way. The company owns several characters that have been well-received for generations, and also operates theme parks, television stations, and now owns Marvel as part of a large media conglomerate. Disney is a go-to company for all forms of child and family entertainment, and their licensed toy products usually sell for a premium over those of competitors. Companies such as Mattel make deals with Disney to produce toys based on their imaginative characters and stories.

The 1990’s were termed the “Disney Renaissance”, where the company produced a multitude of extremely popular films that remain very well-known today. Some of the major ones from this time period include Lion King, Aladdin, Beauty and the Beast, and Mulan. A few years ago, Disney acquired Pixar, a highly successful computer-animated film studio. More recently, Disney returned to making traditionally animated movies with the Princess and the Frog, a well-received and profitable major animated film. Currently, Tangled is in theaters, which remarkably is the most expensive animated movie ever made and one of the most expensive of any types of movies ever made. In other words, Disney’s continued ability to produce high quality family films is clear.

Dividend Yield: 1.08%
Latest Dividend Increase: 14%
Market Capitalization: $70 billion

Mattel (MAT)

Mattel is larger than Hasbro and has a higher dividend yield and lower debt ratios. The company sells toys for boys and girls of various ages and owns the Barbie franchise , Hotwheels and Matchbox cars, Fisher-Price, Uno, and more. The company also licenses several Disney products. Mattel games like Uno and Apples To Apples can be great and inexpensive entertainment for families or friends. The downside for this company is the irregular dividend growth and their lackluster financial performance during the recession.

Unlike Hasbro, Mattel hasn’t experienced growth in the last few years. The company stock, however, trades at a considerable discount to Hasbro stock despite the company’s stronger balance sheet and higher dividend yield.

Dividend Yield: 3.28%
Latest Dividend Increase: 11%
Market Capitalization: $9 billion

Full Disclosure: As of this writing, I have no position in any of the companies mentioned.
You can see my full list of individual holdings here.

One of the things I really focus on when looking for a suitable investment is a great balance sheet. I want to own a company with plenty of cash and little debt. Sometimes I’m willing to make exceptions for unusually durable businesses, but overall, I try to keep my portfolio filled with companies that boast better-than-average financial strength. These are not necessarily recommendations, and a closer look is of course required, but here are seven companies that might be appealing to investors looking for a high-quality financial situation:

Automatic Data Processing (ADP)

Automatic Data Processing is one of the world’s largest outsourcing companies. ADP deals with human resource needs, benefits, payroll, and computing processes for many companies around the world. They prepare employee payroll checks, direct deposits, and tax reports. They capture, calculate, and record employee time and attendance. They perform hiring services. They provide record-keeping and administrative services for retirement plans. Basically, if it’s an uninteresting part of a business, ADP can help with it.

Total Debt/Equity: 0.01
Dividend Yield: 3.12%
Full ADP Analysis

Exxon Mobil (XOM)

Exxon Mobil is one of the largest oil and gas companies in the world, and has one of the best balance sheets in the business. With a market capitalization of approximately $350 billion, the company is absolutely massive. XOM has investments in both oil and natural gas, and has both upstream and downstream projects. The company has a great long-term return on equity, and they spend considerable amounts on share buybacks in addition to paying the dividend.

Total Debt/Equity: 0.13
Dividend Yield: 2.47%

Costco Wholesale (COST)

Costco is a very high quality, growing company with a developing economic moat and a very, very strong balance sheet. The company has a better balance sheet than Walmart (WMT), and most of the equity is real rather than consisting of a lot of intangibles or goodwill. Costco is approaching a count of 600 stores and is expanding internationally in Canada, Mexico, UK, Japan, South Korea, Taiwan, and Australia. Due to the fairly high valuation, the dividend yield is a bit on the low side.

Total Debt/Equity: 0.20
Dividend Yield: 1.20%
Full COST Analysis

Microsoft (MSFT)

Microsoft, the software juggernaut, has a fairly low valuation and still has a very strong balance sheet. Microsoft is the maker of Windows, Office, Xbox, and other products, but is having its economic moat threatened by its less-than-desirable performance in the mobile operating system and mobile electronics devices markets.

Total Debt/Equity: 0.22
Dividend Yield: 2.46%

Analog Devices (ADI)

This company produces a variety of high performance analog and signal processing systems. Analog systems convert signals in the real world, like temperature or pressure, into electrical signals that can then be interpreted by the rest of an electrical system. The company has a current ratio of over 5, which means they have a ton of cash on hand in addition to their low debt levels.

Total Debt/Equity: 0.13
Dividend Yield: 2.40%

National Presto Industries (NPK)

National Presto is a small, diversified company. The company makes cooking appliances, diapers, and ammunition. NPK pays an annual special dividend and regular dividend, and for the past several years, the total dividend yield has been considerable. The company has zero debt and a current ratio of over 5, which is spectacular. There is considerable inside ownership, and the stock valuation is fairly low.

Total Debt/Equity: 0.00
Dividend Yield: 6.50% (including special dividend)
Full NPK Analysis

The Buckle (BKE)

The Buckle is a retailer with zero debt that sells medium and higher priced casual apparel to young men and women. The dividend can be unpredictable due to special dividends. Much like NPK, there is considerable inside ownership. This year, regular dividends plus the announced special dividend total $3.30 which translates into a yield of over 8%.

Total Debt/Equity: 0.00
Dividend Yield: Varies

Full Disclosure: At the time of this writing, I own shares of XOM and NPK.
You can see my individual holdings here.

There seems to be a general misconception, especially among non-investors but even among some supposed investors, that stock performance is directly related to company performance.

In a rational world, stock prices would reflect company performance and future expectations, adjusted for risk. In this world, stock prices reflect human psychology, and are only indirectly related to actual company performance.

Some people who are inexperienced with investing may view a rising stock price as direct evidence that the company is performing well. Similarly, they may conclude that if a stock price is falling, the company has performed poorly.

In reality, a company can perform quite well while its stock does not. Consider the following five examples:

Wal-Mart

Have a look at the long-term Wal-Mart stock performance.

Wal-Mart must have performed pretty poorly to have 10 years of no stock growth, right?

Apparently not. Wal-Mart grew its net income from approximately $6.3 billion in 2001 to $14.3 billion in 2010. That represents earnings growth of nearly 10% compounded annually. Earnings-per-share grew even faster due to share repurchases, and the company paid a dividend for the whole period as well.

Coca Cola

Have a look at the long-term Coca-Cola stock performance.

Coke’s chart is even more depressing than that of Wal-Mart. The company must have made some huge mistakes.

As it turns out, Coke grew its income from approximately $2.2 billion in 2000 to $6.8 billion in 2009. That’s more than 13% annualized earnings growth. And Coke paid dividends the entire time as well.

Microsoft

Have a look at the long-term Microsoft stock performance.

That poor stock trend must be well-deserved. Throughout this decade, Microsoft has failed to stop Google and Apple from attacking its moat and market dominance.

Turns out that Microsoft didn’t perform so badly. Microsoft grew net income from approximately $7.3 billion in 2001 to nearly $18.7 billion in 2010. That’s a growth rate of 11% annually, plus dividends for part of that time. EPS actually grew at a rate of 14% due to share repurchases.

Johnson and Johnson

Have a look at the long-term Johnson and Johnson stock performance.

That’s a little better, but still pretty flat. By the appearance of it, Johnson and Johnson must have had fairly mediocre company performance.

Actually, the health care juggernaut performed exceptionally well. JNJ managed to turn 2000 earnings of $4.8 billion into nearly $12.3 billion in 2009. This represents 11% annualized earnings growth. In addition, they of course paid dividends to shareholders each year.

Medtronic

Have a look at the long-term Medtronic stock performance.

I’ll skip the sarcasm this time: They did great.

Medtronic grew net income from a little over $1 billion in 2001 to nearly $3.1 billion in 2010. That’s more than 13% annualized growth, and they paid dividends as well.

What happened?

What do these five companies have in common? They were all drastically overvalued 10 years ago. These companies have all performed very well financially over the past 10 years, and yet their stocks have gone nowhere. This illustrates perfectly the “lost decade” of investing.

Investors a decade ago saw the bright futures of these five remarkable companies, and they paid a premium for shares of them. Unfortunately, they drastically overpaid, and therefore their returns were lackluster. Value investors, on the other hand, wisely understand that regardless of how well a company is performing, their stocks must be purchased at a reasonable price.

People claim buy-and-hold is dead. It’s not dead. You simply have to do it correctly by buying great companies at reasonable prices.

All of these companies have great valuations right now. Some of them have some pretty big obstacles ahead, so it’s important to investigate them thoroughly, but in general the values now are much more reasonable than they were in years past.

Company	Current P/E
WMT	14.1
KO	19.3
MSFT	11.5
JNJ	13.2
MDT	11.2

Full Disclosure: I own shares of KO and JNJ. I have no position in any of the others, but MDT is on my buy list and MSFT and WMT are on my watch list.