Start Your Day With a Bowl of Dividends

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Investing in dividend stocks is one of the best ways to build wealth over long periods of time.  Businesses with the best track records of paying dividends for decades on end usually sell products that consumers buy regardless of the prevailing economic climate.  To that end, the major cereal makers in the United States offer what most dividend investors crave:  a constant stream of dividends that are raised on an annual basis.  Here are two companies that are staples of long-term dividend payers, as well as a smaller cereal company that might be better for growth-oriented investors.

General Mills (NYSE: GIS) represents the best of what dividend stocks have to offer.  The company offers food products that can be found in almost every household in America, including Cheerios, Cinnamon Toast Crunch and Wheaties, not to mention a stable of other food products.  Last year, General Mills raised its dividend 8% and has a five-year compound annual growth rate of 11%.  The company has paid uninterrupted dividends for an astounding 113 years in a row.  For fiscal year 2012, net sales increased 12% from the previous year.  In addition, return on average total capital was greater than 12%.  Earnings per share suffered as inflation led to higher input costs.  However, the company is still solidly profitable and has an enviable dividend track record.  The company is modestly valued, with a trailing price-to-earnings ratio of 15 and a dividend yield of 3.2%.

Kellogg Company (NYSE: K) is the closest competitor to General Mills.  Its brands include Special K and Corn Flakes, among a host of other food offerings.  Kellogg has a slightly lower market value than General Mills, which stands at roughly $21 billion.  Kellogg carries a higher valuation than its peer, with a trailing P/E ratio of 18 and a dividend yield of 3% at recent prices.  Kellogg has paid a dividend every year for the past 88 years, and has raised its shareholder payout at a five-year compound annual growth rate of 7.25%.  Investors may have been disappointed by the slowing dividend growth recently.  2012’s increase amounted to only 2% from the previous year’s distribution.  However, like General Mills, Kellogg has performed well in the face of higher costs.  Sales over the first three quarters of 2012 increased 4.5% versus the prior year.  The company will announce its full-year results on February 5.

Post Holdings (NYSE: POST) is a small-cap competitor with a market capitalization of $1.25 billion.  Post operates entirely in cereal, with many well-known brands including Honey Bunches of Oats and Raisin Bran.  The company was founded all the way back in 1897.  Post began trading in 2012 after being spun-off from Ralcorp Holdings.  For fiscal year 2012, Post reported diluted earnings per share of $1.53, meaning the shares trade for a trailing P/E ratio of 25.  Unfortunately for investors, the stock does not pay a dividend.  Instead, management notified investors in its annual report that it intends to use cash flow to reduce debt, make acquisitions and/or share repurchases.  In September, Post bought back 5% of its outstanding shares.  While the stock has a smaller market value, and possibly more room to run than its competitors, I’d like to see a dividend before I jump in to this one.

The Bottom Line

As the saying goes, breakfast is the most important meal of the day.  These companies should be all-too familiar names for many investors.  Fortunately, both General Mills and Kellogg have paid uninterrupted dividends to shareholders for many decades.  Those records are poised to continue for years to come, and as a result both stocks should be on the shopping list for most income investors.

Robert Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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