Proceed with Caution with these Dividend Stocks

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

Companies with long track records of paying and raising their dividends are some of my favorite investments.  I’m a firm believer that a dividend is one of the best ways a company can simultaneously prove its own health as well as provide investors with a real return on their investment.  Many companies with the longest dividend histories will be fantastic investments for decades to come.  For me, however, the search doesn’t end with the number of years a company has paid a dividend.  The rate of growth matters too, and the lack of strong dividend growth is what is keeping me from buying these three stocks.

Pitney Bowes (NYSE: PBI) has one of the highest yields of the S&P 500 at more than 12%.  Unfortunately, the huge yield has much more to do with the stock’s dramatic price decline than its dividend growth.  Pitney Bowes began falling from $40 before the Great Recession, and unfortunately for investors, hasn’t stopped falling.  The stock now trades in the low teens.  While the company has increased its dividend for 30 years in a row, dividend growth has slowed down to the point where the last three annual increases were only a half cent per share.  Pitney’s underlying performance lately has reflected my concerns: sales through the first nine months of 2012 declined 5.5% year over year.  Meanwhile, diluted earnings per share dropped 6% during the same period.

Cincinnati Financial (NASDAQ: CINF) is a $7 billion property casualty insurer in the United States.  The stock performed extremely well last year, increasing almost 40%.  Its dividend, however, has not shown nearly the same growth over the last few years.  The five-year compound annual growth rate of Cincinnati Financial’s dividend is only 2.7% per year.  Amazingly, the company has raised its dividend for 51 years in a row.  However, the last dividend increase was less than 1%.   From a valuation perspective, the stock now trades for a trailing price-to-earnings ratio north of 19.  As recently as September 2011, Cincinnati was trading near $25 per share and yielding more than 6%.  Now, because of the soaring share price and lack of meaningful dividend growth, the stock yields only 3.7%.

Nucor (NYSE: NUE) is a U.S. based steel manufacturer with a $15 billion market capitalization.  To the company’s credit, Nucor navigated the financial crisis much better than its rival steel stocks.  In December, Nucor increased its dividend for the 40th year in a row.  Nucor has raised its dividend every year since it first began paying dividends in 1973.  More telling for me, however, is that the most recent dividend increase was one half of one percent.  The stock currently yields 3%, better than the broader market, but comparable yields can be found with much better dividend growth profiles.

The Bottom Line

I appreciate dividend growth as much as the next investor, but to me token increases signify a company’s desire to stay among the Dividend Aristocrat list more than a real signal of a company’s financial health.  These three stocks are certainly profitable businesses, but their dividend growth leaves a lot to be desired.  I prefer to find companies that not only provide regular dividend increases, but can offer more substantial percentage growth in the mid-to-high single digits, if not higher. 

rciura has no position in any stocks mentioned. The Motley Fool recommends Nucor. 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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