3 Top Dividend Growers

October 29, 2020 David Sterman

What’s your go-to indicator for evaluating stocks? Earnings per share? Price-to-earnings (P/E) ratio? Moving averages? Analyst ratings?

All of these – and more – have their place in any due-diligence strategy. But an important metric that’s often given short shrift is one of the easiest ones to analyze: dividends.

When a dividend-payer has a record of consistently increasing its payouts over time, it’s a clear indication of that company’s profitability and its ability to weather downturns. Dividends can also soften the blow of a stagnant or declining share price.

Which leads me to the best thing about dividends: They constitute real money. Cash that you can pocket or cash that you can use to purchase more shares of the payer.

Contributor Dave Sterman identifies three companies that have increased their payouts in recent years and are expected to continue doing so.

— Bob Bogda, Editor

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Uncle Sam is quite fortunate. Moves by central banks to help stimulate economies mean that the interest rates that governments pay on their bonds are extremely low. A 10-year U.S. Treasury, for example, yields just 0.79% these days. Investors willing to buy 30-year government bonds are handed an interest rate of just 1.56%.

Many dividend-paying stocks can do better. The average stock on the S&P 500, for example, pays a 1.75% dividend yield. These days, that’s decent enough. But if you do a little digging, you can do better. The following three investments offer higher yields—and steadily rising dividends. Even when fixed-income investments like bonds and CDs start to offer higher yields, these stocks are likely to stay ahead of the curve, thanks to their dividend growth.

Broadcom (AVGO)

This diversified chip maker has been extremely profitable thanks to its dominant role in hot tech areas such as wireless communications and data-center computing. Speaking in a recent quarterly conference call, CEO Hock Tan said that a “strong anticipated ramp in wireless, as well as the continuing surge in demand for networking from cloud and telecom customers, should help drive further profitable growth in coming quarters.” Cash flow surged 33% in the most recent quarter to $3.1 billion, compared with a year ago.

And these days, the company is returning its profits back to shareholders at a quickening pace. The dividend has soared from under $2 a share in 2016 to $7 a share in 2018 to a current $13 a share. That’s good for a roughly 3.7% yield.

Generally speaking, a company’s dividend growth tends to mirror its profit growth. And in fiscal (October) 2021, Broadcom’s earnings per share are expected to rise around 15%, to $25.40 a share. That should help the dividend (and its yield) stay ahead of fixed-income yields.

Sysco Corp. (SYY)

When the pandemic first shut down the economy this past spring, the prospects didn’t look good for restaurant suppliers like Sysco Corp. Sysco supplies many of the meats, vegetables, beverages and desserts that end up on a diner’s table.

Like any food-service firm, Sysco had to modify its business model on the fly as clients shifted more toward take-out and delivery services. Six months later, “We are not just managing through the crisis, we are transforming our company during this crisis,” says CEO Kevin Hourican. For example, Sysco is helping more restaurants set up “marketplaces” where pre-made meals can be served in a sort of retail pop-up shop.

And even as the company pivots toward industry changes, Sysco has also taken a hard look at costs this year, taking $500 million in annual expenses out of its cost structure. As a result, while sales are expected to rise around 12% next year (to around $58 billion), per-share profits should rise more than 60% to around $3.50 a share.

And that kind of profit growth should enable Sysco to continue to support solid dividend growth. The dividend was hiked 12% this year to $1.68 per share (good for a 3.3% yield). The strong profit outlook for 2021 portends more double-digit dividend hikes to come.

 

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Jefferies Financial Group (JEF)

This New York City-based investment bank has beaten quarterly profit forecasts by an average 428% over the past two quarters, leading to rising full-year estimates. To be sure, earnings per share of around $1.80 represent a 40% drop from last year, but analysts had expected earnings to plunge by a far larger margin when the pandemic took root.

In the face of respectable profits in an otherwise tough economic environment, this bank recently moved to hike its payout 20%, to $0.60 a share. That comes on the heels of a 50% increase in the dividend in 2019, and the yield now stands at an impressive 3.1%.

As another vote of confidence, Jefferies recently announced plans for a $250 million share buyback. Trading at a recent $20, shares remain below tangible book value of $26.49 a share. Buying back stock when it “trades below book” is a no brainer. That’s because the share count falls even faster than the book value, in effect, boosting book value per share.

As CEO Rich Handler said in an earnings-related press release: “We will continue to re-purchase shares when prudent from a balance sheet and capital allocation perspective, as we believe there continues to be a significant gap between our intrinsic value and our stock price.”

Action to Take: Buy shares of Broadcom, Sysco and Jefferies at current prices and consider them to be long-term holdings until the yield on 10-Year Treasuries rises to 2.5%. That could be several years from now.

 

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