Fat Dividends for Lean Times
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Amidst tough economic times it's critical that investors produce significant passive income. In this post we'll examine several dividend stocks that meet specific income-producing criteria, expand upon current market opportunities, and offer growth potential to investors. By doing so, investors will be better able to analyze potential investment opportunities, as well as acquire knowledge of key stock metrics.
The first of these, Royal Dutch Shell (NYSE: RDS-B), offers a whopping 5.3% payout. But it's important to execute what I like to call a "dividend x-ray." What's important is not only high yield, but that the stock also possesses a strong dividend history and excellent dividend growth. In other words, the company needs to have paid dividends consistently for at least 20-30 years (and hopefully longer) and never missed a payment. Payout consistency is key, as investors want reliable income. Next, the company's dividend needs to offer income growth. Does the company increase its dividends on at least a yearly basis, and if so at what rate? Also, it's important to examine less mentioned aspects of special dividend payments. Does the company reward long-term investors with optional "bonus" payments, often at a higher rate?
So, let's "x-ray" Royal Dutch Shell. Recently, the company introduced a new DRIP that initially lets Royal Dutch check out without any broken bones. But let's analyze further. Does the company offer regular payouts, and if so for how long and is there a healthy rate of increase? When we x-ray our stock, it clearly possesses regular quarterly payouts, but the rate of increase is unimpressive, and as a heavy weight large cap stock long-term growth may be limited. Therefore, a special dividend here would be rare, if not unheard of. In sum, although the 5.3% yield is initially impressive our x-ray seems to reveal that Royal Dutch has a few fractures. So, let's keep moving.
Next, let's explore our options when it comes to Transocean (NYSE: RIG). To be honest, the company is not without its share of headaches, primarily its involvement in the 2010 Deepwater Horizon oil spill. That being said, this alone shouldn't keep it from the running. On initial glance the company offers a juicy 4.5% yield. However, as before, it's time to get to work applying the x-ray. Drilling down further we can see Transocean's payouts are irregular at best and highly inconsistent to say the least. But let's discount that judgement momentarily. Remember that the company has been saddled with ongoing litigation for several years, and yet despite this the fat 4.5% yield is enticing. However, for brevity's sake let's skip on the rate of increase as the company's infrequent dividends do not make this an accurate analysis, and in fairness as a more speculative debt-laden stock Transocean is not a prime candidate for long-term value investing. For these reasons I think I'll pass.
Third, let's critically consider Phillip Morris International (NYSE: PM). Although I favored the company several years ago, I don't any longer. Currently, Phillip Morris is pricey and its yield could be made much more enticing for a tobacco company. By any objective measurement the stock is expensive. And although it has a good yield its current evaluation and P/E of close to 17 make investing it in a stretch. That being said, let's apply our x-ray and verify that these assumptions are correct. For the last four years the stock yielded roughly a 10% increase (Q1 2013), a 17% increase (Q1 2012) a 10% increase, a 13% increase (Q1 2011) and a 7% increase (Q1 2010). Therefore, the average rate of increase across years is a healthy 11.8% and payouts have been consistent long-term. Therefore, it may be wise to wait for the right price point and then pounce.
In sum, while none of these stocks are perfect, my selection is Phillip Morris International--but at the right price. The stock combines excellent regular payouts with superior rates of increase year to year, and the company as a whole has excellent growth prospects in the developing world. However, Wall Street is currently bullish on Phillip Morris, so again it might be wise to wait to buy until the price is right. But if I had to make an investment right now, that would be my choice. That being said, at least for the moment, I choose none of the above.
Explore Your Options
This is just a cursory examination! There are even more foreign dividend stocks. While no stock is a sure thing and each carries unique risks, opportunity abounds in both good markets and bad. Be sure to examine your individual investment objectives prior to and during investment. By doing so, you'll go a long way towards making sound long-term financial decisions, minimizing taxes and fees, and increasing total ROI in the process
Tobacco companies have been under siege in the U.S. for decades, as waves of litigation, regulation, and anti-smoking campaigns have given the industry a black eye. Yet Philip Morris International focuses on overseas markets, where business prospects generally look brighter. Investors have been happy with its stock's performance, but is Philip Morris still a buy? Find out in The Motley Fool's premium research report on the company, which includes in-depth analysis of its opportunities and challenges ahead. To claim your report just click here now.
David Mercer is long on PM.The Motley Fool owns shares of Philip Morris International and Transocean. 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!