We will soon be entering what is likely to be a really strong holiday season, and now would probably be a good time to jump into action. So you may be wondering why I’m talking about this kind of boring all-seasons value-based strategy.
For one thing, a boring strategy is a good one if it generates steady returns. You would even call it great if it helps you ride over volatility.
And there’s likely to be plenty of that even if the holiday season turns out great. Because between choosing your new clothes, jewelry and other things and picking them up or having them delivered is a thing called a supply chain.
Unless you choose to brave the stores (and a lot of folks are likely to do just that), in which case, you could still face a challenge finding the color or size or look you were searching for. Because everything is moving, but supply chain and transportation issues remain, so it’s all moving slower than normal.
And as far as technology is concerned, demand is somewhat tempered on the consumer side as more and more offices continue to reopen, with more people adopting a hybrid mode, the delta variant notwithstanding. This in turn is leading to some pickup on the enterprise side.
The holiday season will still likely be a good one for tech, although it may not look that way given the front-end loading we are seeing this year. Supply chain issues will more likely than not persist for the rest of the year, as delta slows down some Asian production.
Other areas of particular strength are manufacturing and materials, but here too, we’re seeing supply chain issues and rising input costs.
And the labor market constraints are adding to the uncertainty for all.
So it’s a growth environment with uncertainty and volatility built in. And under such circumstances, income-generating stocks make sense, because they hedge any possible losses to volatility.
Which brings us to the topic of dividend stocks themselves. When should you buy them? How should you choose them? What should you be doing with the dividends earned? Let’s take those one at a time.
Some investors buy stocks with the goal of capturing the dividends alone. They aren’t looking for long-term cash flow. So they typically select high-yielding stocks with an annual dividend, since it’s easier to make profit when there’s a single large payout.
Buying stocks just before the ex-dividend date and offloading as soon as the dividend is paid constitutes this strategy. But whether it actually generates profit is debatable, because stocks often dip right after the dividend is paid, so you’d most likely be saddled with capital losses you hadn’t bargained for.
A safer strategy is to consider dividend stocks from the long-term angle. Buy them when they’re not too expensive and hold them for the capital gains as much as for the dividend. This helps you generate income even when the stock may be taking a dip, for some reason or other.
Also check how the company has been doing of late. Check whether analysts expect it to continue generating earnings growth because only a profit-making company will have the free cash flows that may be applied for continued dividend payments. Since a company isn’t obligated to pay a dividend, it’s essential to determine its health before committing your funds to it.
And then consider the dividends earned. There are a number of things you could do with this cash. You could spend it, save it, buy another company’s stock with it, or reinvest it into more shares of the company, so your cash flows increase over time.
Don’t Forget Your Safety Net
Recent Price Performance: If shares have been moving up rather than down, it’s an indication that current yields aren’t a by-product of falling prices. Because when prices fall, you need to pay a lower amount per share to earn the same dividend. While this can seem attractive, it can mask ongoing issues at the company (that could be related to demand, supply, internal problems, competition, the stock market, or any other issue), responsible for the lower prices.
Needless to say, these stocks aren’t the best places to put your money. Stocks are really attractive when their dividend yields are more or less steady or growing despite rising prices.
EPS Growth Potential: A company that continues to generate earnings growth has a better chance of continuing to make dividend payments. So earnings growth potential is an important consideration.
Strong/Steady Cash Flows: Similar to earnings growth potential and related to it, increasing cash flows generally ensure continuity in the dividend stream.
Low Debt-Cap Ratio: While its stands to reason that a company that has lower debt to service will have more cash left to pay shareholders, the debt-to-total capitalization ratio typically varies by industry. It is customary for some industries to carry more debt because the nature of the business requires more capital outlay.
Large Cap: Companies with large capitalizations tend to be more mature and have therefore been around for a while. They are usually able to deal with economic and market-driven ups and downs better than others. So their dividend streams are likely to be more stable.
Here are a few examples-
Fidelity National Financial, Inc. FNF
Fidelity National is a leading provider of title insurance, specialty insurance and claims management services.
The Zacks Rank #2 stock with a value-growth-momentum (VGM) Score of A belongs to the Insurance – Property and Casualty industry, which is in the top 20% of Zacks-classified industries. It pays a dividend that yields 3.11%. Its 5-year historical dividend growth is 9.29%. Dividends per share represent a growth trend since 2010 (barring an extraordinary payout in 2017).
The company is currently expected to grow its revenue and earnings a respective 19.8% and 24.0% this year before a correction next year. 2021 and 2022 earnings estimates have increased 48 cents (7.8%) and 16 cents (3.0%) in the last 30 days. Earnings have grown an average 21.8% over the last five years.
The shares are up 18.6% year to date, stronger than the S&P 500’s 20.2% (the index is heavily weighted toward high-growth tech stocks).
At 7.99X P/E, the shares are trading below the S&P’s 21.52X and its own median value over the past year of 8.61X.
Marubeni Corp. MARUY
Marubeni Corporation purchases, distributes and markets various industrial and consumer goods worldwide. Its export, import and other operations in Japan cover food, textiles, materials, pulp and paper, chemicals, energy, industrial, metals and mineral res and transportation machinery industries. It is also involved in power projects, infrastructure development, real estate development and construction, as well as finance, logistics and information operations.
The Zacks Rank #1 stock with a VGM Score of B belongs to the Diversified Operations industry (top 20%). It pays a dividend that yields 1.90%. Its 5-year historical dividend growth is 4.28%. The company started paying a dividend in 2018, which popped last year, as it tried to attract investors in the face of plunging revenue and earnings. Dividends normalized this year as business conditions improved.
The company’s earnings are expected to surge 62.7% this year before a slight correction next year. 2021 and 2022 earnings estimates have increased $2.28 (13.2%) and $1.80 (10.4%) in the last 30 days. Earnings have grown an average 29.4% over the last five years.
The shares are up 30.0% year to date, stronger than the S&P 500.
At 4.50X P/E, the shares are trading below the S&P 500 and its own median value over the past year of 5.79X.
Mitsui & Co. MITSY
Mitsui Group comprises more than 860 subsidiaries and associated companies with operations in chemicals, foodstuffs, general merchandise, iron and steel, machinery, nonferrous metals, textiles, energy, and real estate and service industries.
The Zacks Rank #2 stock with a VGM Score of A belongs to the Metal Products – Distribution industry (top 48%). It pays a dividend that yields 2.95%. Its 5-year historical dividend growth is 3.49%. MITSY’s dividend typically rises and falls every other year, although the overall trend has been rising since 2013.
The company’s earnings are expected to surge 128.2% this year before a slight correction next year. 2021 and 2022 earnings estimates have increased $10.76 (14.3%) and $3.38 (4.2%) in the last 30 days. Earnings have grown an average 16.6% over the last five years.
The shares are up 27.1% year to date, stronger than the S&P 500.
At 5.53X P/E, the shares are trading below the S&P 500 and its own median value of 8.78X over the past year.
Volkswagen AG VWAGY
Volkswagen, one of Europe’s largest automakers, manufactures and sells automobiles primarily in Europe, North America, South America and the Asia-Pacific. Its four segments include Passenger Cars and Light Commercial Vehicles, Commercial Vehicles, Power Engineering, and Financial Services. With nine independent brands, it is able to offer a unique range of models from the extremely efficient 3-liter car to the great sporting tradition of Bentley.
The Zacks Rank #2 stock with a VGM Score of A belongs to the Automotive – Foreign industry (top 40%). It pays a dividend that yields 1.11%. Its 5-year historical dividend growth is 95.98%. The strong growth in Volkswagen’s dividend in the last five years is mainly because it didn’t pay a dividend in 2016, as it was recovering from a dismal operating performance in 2015. It utilized the last five years to bring dividends back to a decent level of $0.35 to $0.40 a share.
The company’s revenue and earnings are expected to grow a respective 19.3% and 77.3% this year followed by 5.0% revenue growth and 7.2% earnings growth in the next year. 2021 and 2022 earnings estimates have increased 14 cents (4.2%) and 15 cents (4.1%) in the last 60 days. Earnings have grown an average 23.3% over the last five years.
The shares are up 58.3% year to date, stronger than the S&P 500.
At 8.94X P/E, the shares are trading below the S&P 500 and its own median value of 9.03X over the past year.
Nucor Corp. NUE
Nucor is a leading producer of structural steel, steel bars, steel joists, steel deck and cold finished bars in the United States. It also produces direct reduced iron (“DRI”) that is used in its steel mills. The company has 123 operating facilities, primarily in the United States and Canada. Most of its customers are also located in North America.
The Zacks Rank #1 stock, belonging to the Zacks-classified Steel – Producers industry (top 10%), has a VGM Score of B. It pays a dividend that yields 1.53%. Its 5-year historical dividend growth is 2.0%. Dividends per share have grown every year since 2010, even when revenues have seen ups and downs.
The company is currently expected to grow its revenue and earnings a respective 73.6% and 478.7% this year before a correction next year. 2021 and 2022 earnings estimates have increased 39 cents (2.1%) and $1.78 (19.5%) in the last 30 days. Earnings have grown an average 12.6% over the last five years.
The shares are up 100.0% year to date, stronger than the S&P 500’s 20.3%.
At 7.94X P/E, the shares are trading below the S&P’s 21.52X and its own median value over the past year of 13.34X.
Year-to-Date Price Performance
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Nucor Corporation (NUE): Free Stock Analysis Report
Mitsui & Co. (MITSY): Free Stock Analysis Report
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Marubeni Corp. (MARUY): Free Stock Analysis Report
Volkswagen AG (VWAGY): Free Stock Analysis Report
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