Do These 3 Popular Dividend Investments Make the Grade?
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The Wall Street Journal columnist Kelley Wright wrote a column over the weekend that looked at the issue of dividend investing. The message was that many investors have the idea of dividend investing all wrong, as a good investment is not necessarily a high yield. There are a number of factors at play, and Wright provided both a guide and top stocks. I am assessing three of these selections.
According to Wright, a yield must continue to rise, meaning yield outperforming stock performance. This indicates that a company is consistently increasing its yield over a period of time, let’s say five years. Furthermore, the company needs a strong balance sheet, indicating safety for long-term dividend investors, and a consistent pattern of growth. Wright provided a top 10, but I am looking at three, all of which are different levels of value as a dividend investment.
A Good But Not Great Dividend Investment
Air Products & Chemicals (NYSE: APD) is the quintessential secular investment, one that pays out a dividend yield of 3.3%. Over a period of five years it has lost 8.1% of its value while the company has increased its dividend by 61% during the same period. As a result, the company’s dividend growth has outperformed its stock, although the total return is less than the Dow Jones’ five-year return.
In terms of balance sheet strength, the company has a debt-to-assets ratio of 35%, below the 50% mark that most dividend investors consider “risky.” In regards to fundamental performance, revenue has remained near flat while margins have expanded. The company is fairly valued with a P/E ratio of 15.56, which is near equal to the S&P 500.
Overall, I consider APD a good dividend investment, not great, with a strong balance sheet, good yield, fairly valued, but one with lousy stock performance.
A Great Addition to Your Dividend Portfolio
Walgreen (NYSE: WAG) is a company that meets and exceeds all qualifications as a good dividend investment, according to Wright. The company’s dividend has outperformed its stock over the last five years by a 5-to-1 ratio. Over the last five years it has seen significant top-line growth and margin consistency despite the patent cliff bringing on struggles for Big Pharma. In addition the company has a debt-to-assets ratio of just under 18%, providing reason to feel secure in the stock’s future. As a result, Walgreen looks to be a great addition to a dividend portfolio.
A Good But Pricey Selection
Texas Instruments (NASDAQ: TXN) is another Wright selection that looks good in most areas. Like Walgreen, the company has seen greater dividend performance than stock over the last five years, also 5-to-1, and has also seen near equal growth to Walgreen during the same period. However, it does have a higher debt-to-assets ratio of almost 30% and is quite pricey with a P/E ratio of nearly 24.0. As a result, the stock makes the grade on some metrics, but not all.
Not everyone reads the Journal; personally I do and find it both informative and entertaining. In my book, Taking Charge With Value Investing (McGraw-Hill, 2013), I examine the principle of keeping the process of investing simple. Investors should always seek patterns, try to identify and create rules, and stay stubborn and true to those rules that are set. In Wright’s piece, these principles are also demonstrated, as Wright gives rules to live by for the dividend investor. Now, you don’t have to honor these specific rules, but it is good to find some that match your form of investing, so that you can quickly navigate the market and easily separate those investments that may fit into your portfolio.
Brian Nichols has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!