3 Cheap Stocks Paying Consistent and Growing Dividends

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Investments give investors two sources of income: dividends and capital appreciation. Income investors would prefer big companies, which pay consistent growing dividends over time, so that they can have constant income for their living expenses, and feel safe with those companies. Of course, investors should be worried about companies that keep paying consistent growing dividends, but the amount of dividends are more than what they earn on that particular year. I’m looking for investment opportunities for income investors into cheap large cap companies, which has decent histories of paying consistent and growing dividends. The screen is based on four main criteria: (1) at least 5 years of historical dividend payment, (2) payout ratio is less than 15%, (3) dividend growth rate is greater than 5% per annum, and (4), the EV/EBITDA is less than 5x. Here are the top 3 companies: 

Apache Corporation (NYSE: APA) is an exploration and development company for crude oil, natural gas and natural gas liquids in six geographic areas: the US, Canada, Australia, the North Sea, the UK, Australia, Argentina and Egypt.  As of December 2011, the estimated proved reserves were nearly 3 billion BOE, and 43% of that was in the US. In 2011, it produced 273.1 MMBOE, and 38% of that was produced in the US. Apache has the history of paying consistent and growing dividends. In 2002, it paid out $0.19 dividend per share, and in 2011, the annual dividend was $0.60 per share. So over the last 10 years, the annual dividend growth is more than 12%.

The current payout ratio is only 10.3%. Trailing twelve months, it delivered a 13.6% return on invested capital, along with the net margin of 26.7%. Currently, it is trading at $77.14 per share, with the total market capitalization of $30.18 billion. The market is valuing Apache at only 7.6x forward earnings and only 3.34x EV/EBITDA.

Aaron’s (NYSE: AAN) is the specialty retailer of household appliances, electronic products, furniture and accessories in 1,232 company-owned stores and 713 franchised stores in the US and Canada. The business has combined traditional retailing with rent-to-own model, allowing customers to either purchase products outright or lease it with the opportunity to own it. Aarons' model allows customers to obtain ownership of around 46% in the beginning of the lease, higher than that of rent-to-own model of around 25%.  The majority of revenue derived from lease operations, of $1.5 billion out of $2 billion in total revenue. The second highest revenue was from non-retail sales, of $388 million in 2011. The retail and franchise fees were only around $100 million in revenue combined.

Aaron's began to pay a dividend in 2006, of $0.03 per share. In 2011, the dividend was $0.05 per share, thus the annual dividend growth for the last 6 years was 5.2%. It has a quite low payout ratio, fluctuating in the range of 2.9% - 4.1%, and currently at 2.9%. Trailing twelve months, its ROIC was 14.35%. Aaron's is trading at $29.26 per share, with the total market capitalization of $2.55 billion. The market is valuing the company at 11.4x forward earnings and only 2.3x EV/EBITDA.

HollyFrontier Corp (NYSE: HFC) is the result of the merger between Holly Energy Partners and Frontier Oil Corporation in July 2011. It is involved in refining high value light products including gasoline, diesel fuel, jet fuel, etc, which is divided into two segments: refining and Holly Energy Partners. The majority of revenue were from gasoline and diesel fuels sales, accounting for 48% and 32% of total 2011 sales, respectively. The business has a customer concentration; in 2011, 13% of revenue was from Sinclair and 10% of revenue was from Shell Oil.

HollyFrontier has a history of paying consistent and growing dividends as well, from $0.05 per share in 2002 to $0.34 per share in 2011, an annualized growth of 21.13%. Currently, the payout ratio is only 6.7%. The company is trading at $45.48 per share, with the total market capitalization of $9.24 billion. The market is valuing HollyFrontier at 7.8x forward earnings and only 2.89x EV/EBITDA.

Foolish Bottom Line

With a strong history of paying consistent and growing dividends at the decent rates, low payout ratio and low EV/EBITDA, those three companies mentioned above should be considered by long-term investors for their income investment portfolios.


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Apache. 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!

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