There is no Dividend Bubble
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There is no "Dividend Bubble."
Do not believe any of the articles warning about the "Dividend Bubble." Dividend-paying stocks are alive and well. According to an analysis by Bank of America, the top 100 dividend paying stocks have provided, on a rolling basis, an average return of 16% since 1984.
According to one article about a "Dividend Bubble" for "great stocks" that is forming, "There are several driving forces behind this move. Treasuries and bonds are becoming solely for those who just cannot take the volatility of traditional investing. The 10-year Treasury yield is a dismal 1.5%, and even the 30-year is yielding only about 2.6%. Getting more than 1% interest on a bank CD is becoming a challenge. Europe is threatening to pull down the American growth story in an election year. And all of this is happening at a time when the dividend taxes are currently set to increase substantially if no changes are made to the tax code before the end of 2012."
Investors can easily circumvent any of these through the purchase of dividend paying stocks with high yields, strong profit margins, solid growth and a low payout ratio, the amount of earnings needed to finance the payment. These combine to prevent a "Dividend Bubble" from forming.
NextEra Energy (NYSE: NEE), an electric utility based in Florida, offers a very attractive dividend framework. The dividend yield is around 3.5%. The average dividend for a member of the Standard& Poor's 500 Index is about 2%. The payout ratio for NextEra Energy is 44%, below the mean historic payout ratio for dividend income of over 50% for a Standard & Poor's 500 Index company. This ample cash flow allows for dividend growth, which for NextEra Energy has been 10%.
In addition to being one of the strongest global brand names with an imposing market presence in 119 countries, McDonald's (NYSE: MCD) is also a "Dividend Aristocrat." That is from being a member of, "The S&P 500® Dividend Aristocrats index measures the performance of large cap, blue chip companies within the S&P 500 that have followed a policy of increasing dividends every year for at least 25 consecutive years." McDonald's has a dividend yield of 3.05% with a payout ratio of 48.32%. Now trading around $91 a share, the mean analyst target price for McDonald's over the next year is $101.13.
Asian stocks average about 3% in dividend income, topping the mean for the S&P 500. For China Mobile (NYSE: CHL), the world's biggest mobile phone company in terms of subscribers, the dividend yield is almost 4% with a payout ratio of about 43%. The growth in the mobile phone industry will take place in emerging markets, and China Mobile is well positioned to profit from this expansion of the global middle class. With a profit margin of 23.46% and gross margin of over 94%, China Mobile is obviously a well-run company.
BlackRock (NYSE: BLK) is another firm in an excellent position to profit from global growth. It is already the largest asset manager in the world, investing more than $3.6 trillion for its clients. BlackRock pays a 3.48% dividend with a low, low payout ratio of just 33.39%. Dividend growth from BlackRock has been very impressive at 38%. Just as impressive for investors is the profit margin of BlackRock at 25.97%.
According to a recent report by The McKinsey Global Institute of McKinsey & Co., "Urban world: Cities and the rise of the global consumer class," there will be one billion more joining the "global consumer class" by the year 2025. Along with the affluence comes a richer diet that includes products from ConAgra (NYSE: CAG), a packaged food company based in Omaha, Nebraska that is endeavoring to increase its international sales. ConAgra has a dividend yield of 3.81% with a payout ratio of 49%. The dividend has grown at a 13% rate.
The expansion rate of the dividend component for these companies evinces that management envisions robust profits ahead. With below average payout ratios, the dividend growth is easily affordable. The dividend payout ratios also reveal prudent financial management at the companies. The dividend growth and the above average yield also demonstrates the respect of the management for the rights of minority shareholders.
Historically, dividend income has provided more than 40% of the total return for a stock. There is no reason to doubt that it will fall. If anything it should increase based on the negative peformance of the Standard & Poor's 500 Index since March 2000. With the low payout ratios and strong earnings of each, there is no "Dividend Bubble" looming in the future for ConAgra, BlackRock, China Mobile, McDonald's or NextEra Energy.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of China Mobile and McDonald's and has the following options: short JAN 2012 $55.00 puts on NextEra Energy. Motley Fool newsletter services recommend BlackRock, China Mobile, and McDonald's. 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.If you have questions about this post or the Fool’s blog network, click here for information.
