Three Stocks for Long-Term Income Investors

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Editor's Note: This article has been updated to correctly reflect Darden Restaurants' dividend.

I like to search for great businesses that have high probability of delivering decent long-term results for patient investors. In the past 10 years, these companies have paid uninterrupted dividends for shareholders. They offer investors juicy dividends at more than a 3% yield. Moreover, those businesses are not priced expensively on the market. In this article, I will reveal three stocks that possess similar characteristics in the consumer cyclical sector.

A tasty restaurant

Darden Restaurants (NYSE: DRI) is considered one of the world's biggest full-service restaurant operators, with more than 2,100 restaurants in the U.S. and Canada under several brands including Red Lobster, Olive Garden, LongHorn Steakhouse and Bahama Breeze. In the third quarter 2013, Darden experienced a 4.5% increase in revenue to $2.26 billion. However, the earnings came in at $134.4 million, or $1.04 per share, lower than the net income of $164.1 million, or $1.28 per share in the third quarter last year. The lower net income was due to the higher costs of sales, higher depreciation and amortization and a bit higher interest expense.

Looking forward, Darden expects to have the sales growth of around 6% to 7% and around 105 net new restaurants additions in this year. Its diluted earnings were estimated to stay around $3.06 to $3.22 per share in full year 2013. 

Darden stays on top of the list with the juiciest dividend yield. At $52.60 per share, Darden is worth nearly $6.9 billion. The market does not value it at a premium, at around 8.83 times EV/EBITDA. Income investors might love Darden because of its high dividend yield at 3.9%. Darden was famous to be a consistent dividend-paying company. Since 2003, its dividend has risen from $0.08 per share to $2.00 per share.

EV/EBITDA (Enterprise Value/EBITDA) is quite an efficient ratio which incorporates the cash flow position and the leverage position of the company. It's formula is Enterprise Value = Market Cap - Cash + Debt, so the company which uses a lot of leverage might have small price/earnings ratio but high EV/EBITDA due to high enterprise value.   

Children’s toys could be a win for investors

Hasbro (NASDAQ: HAS),  is known for its famous children's products with several brand names including Transformers, My Little Pony and Baby Alive. It has four main business segments: U.S. and Canada, International, Entertainment and Licensing, and Global Operations. The majority of its revenue, $2.12 billion, was generated from the U.S. and Canada segment. The International segment ranked second with $1.78 billion in sales while the Entertainment and Licensing contributed more than $181.4 million in revenue in 2012.

Recently, Hasbro announced a strategic partnership with World Trade Jewelers so that World Trade Jewelers could design jewelry based on Hasbro’s popular games. Murray Shabot showed the excitement about the collaboration:

“Hasbro’s branded properties are legendary and proving extremely popular within our jewelry creations. Consumers of all age groups immediately recognize the Candy Land, Scrabble and My Little Pony iconography, and will now be able to wear their favorite designs and themes within our licensed jewelry collections.”

In the past 10 years, Hasbro has managed to consistently grow its dividend, from $0.12 per share to $1.74 per share. It is trading at around $44.80 per share, with the total market cap of $5.8 billion. The market values Hasbro at a reasonable valuation, at 8.16 times EV/EBITDA. The company offers its shareholders a nice dividend yield at 3.6%.

Hasbro might deliver a good improvement in its EPS due to its cost-savings initiative of around $100 million in annual savings by 2015. For the full year 2013, Hasbro expected to have around $45 - $48 million in gross savings and the net savings of $13-$15 million. 

This media company is cheap

Gannett (NYSE: GCI), a leader in international media and marketing solutions, is the owner of several iconic brands including USA TODAY and CareerBuilder. It operates in three main business segments: publishing, digital and broadcasting. Most of its revenue, $3.73 billion, or 70% of the total revenue, was generated from the publishing segment while digital and broadcasting contributed $719 million and $906 million, respectively, in operating income. What I like about Gannett is its broadcasting business, with the highest operating margin. The publishing segment delivered only a 9.9% margin, while the operating margin of the broadcasting segment was nearly 49%.

Looking forward, I think that Gannett could be a good activist target with the separation of the highly profitable broadcasting segment from the other two business segments.

Gannett has paid shareholders uninterrupted but fluctuating dividends in the past 10 years. In 2012, the dividend stayed at $0.80 per share. At $20.80 per share, Gannett is worth $4.76 billion on the market. The market values Gannett at only around 5.55 times EV/EBITDA. The dividend yield is quite high, at 3.7%.

My Foolish take

All of those three companies above could fit well in investors’ long-term income portfolios. With juicy dividend yields, uninterrupted dividend-paying records, and low valuation, there will be a high probability that those three companies will deliver a nice total return for shareholders in the long run.

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Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Hasbro. The Motley Fool owns shares of Darden Restaurants and Hasbro. 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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