4 Dividend-Capable Companies for Your Portfolio
William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When looking for income in a low-return era where your typical savings account yields less than 0.10% per year, it pays to look toward investing in high-quality businesses that provide a decent dividend yield. Keep in mind that this bears some risk of capital loss. As a benchmark, consider companies that pay out less than 60% of their reasonably assured free cash flow. The four companies outlined below sit behind high barriers to entry, sell a needed product, and own well-known brands.
Beverage maker Coca-Cola (NYSE: KO) sells the difficult to duplicate Coca-Cola, Sprite, and Fanta sodas. It also sells a number of well-known non sparkling beverages such as Dasani bottled water and Minute Maid juices.
In 2012, Coca-Cola showed the highest increases in consolidated revenue (3%) and free cash flow (17%) among its largest competitors. Coca-Cola also sits on top in terms of margins versus Pepsi and Dr Pepper.
Coca-Cola’s dividend of $1.02 per year per share translates into a 2.7% annual dividend yield. This represents a reasonable 58% of free cash flow with the remainder going into future investment.
Coca-Cola maintains growth momentum from developing economies where people are seeing Coca-Cola and Minute Maid for the first time. Countries like Thailand, India and Russia increased volume 22%, 16%, and 8%, respectively.
Western railroader Union Pacific (NYSE: UNP) competes with only one major railroad in the west, Berkshire Hathaway’s Burlington Northern Santa Fe. Union Pacific also maintains an expensive infrastructure making it difficult for new competitors to come into play.
Union Pacific, due to its diverse lines of freight, fared better in 2012 than some of its eastern counterparts such as CSX and Norfolk Southern who leaned disproportionately on coal, which currently rests in a market trough due to cheap natural gas. Union Pacific grew its revenue 7%. Its free cash flow declined 8% due to an increase in capital expenditures.
As of this writing, Union Pacific pays $2.76 per share per year in dividends. This equates to a roughly 2% annual dividend yield and represents only 45% of its free cash flow, allowing the company to invest in the company while rewarding shareholders tangibly with cash.
Union Pacific’s evenly distributed product freight line should continue to give this company an edge. Its participation in the weak coal segment weighs equally with other robust freight segments such as industrial freight, chemicals, and intermodal.
Household and personal care product company Church & Dwight (NYSE: CHD) owns the famous Arm and Hammer and Oral B brands. This company’s products include laundry detergent, deodorant and electric toothbrushes.
Church & Dwight’s 2012 revenue and free cash flow increased 6% and 24%, respectively. The company currently pays a $1.12 per year per share in dividends yielding 1.9%. This only represents 30% of its free cash flow. Church & Dwight’s small core of successful products makes it more nimble.
Food confectioner J.M. Smucker (NYSE: SJM) makes some of your favorite peanut butter, jelly and coffee. You may recognize the brand names JIF, Smucker’s and Folger’s.
In 2012, J.M. Smucker increased its revenue and free cash flow 9% and 96%, respectively. Price management, new distribution of Smucker’s Uncrustables, and the Sara Lee acquisition account for the revenue increase. A combination of better operating cash flow and reduced capital expenditures explain the robust increase in free cash flow.
Currently J.M. Smucker pays about $2.08 per share per year yielding about 2.30%. This represents roughly 31% of its free cash flow.
On the whole, these companies own solid well known and difficult to duplicate brands. These companies provide a decent yield even though they pay out a prudent portion of their cash flow to shareholders while holding some back for investment in their business. An investor can benefit greatly from the income provided from these companies while waiting for capital appreciation to come to light in these volatile times.
William Bias owns shares of Coca-Cola and Union Pacific. The Motley Fool recommends Coca-Cola. 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!