Another Chance At Choosing Stocks With Dividend Appeal by John Dorfman, Dorfman Value Investments
The past two years have been rough for dividend-paying stocks. Investors kept expecting the Federal Reserve to raise interest rates. The mere threat of a rate increase hurt dividend-paying stocks, which compete for investors’ money with fixed-income vehicles such as bonds and bank certificates.
In the long run, however, dividends are an advantage, not a disadvantage. A study of returns from 1928 through 2013 by Kenneth French and colleagues from the University of Chicago found that dividend-paying stocks offer total returns about 2 percentage points better than non-dividend payers.
Triumphs and Tragedies
When I look for stocks with dividend appeal, I want to see an above-average dividend yield and above-average dividend growth.
I have published 15 columns recommending stocks I think have dividend appeal, beginning in 1998. Overall, the record has been pleasing. Of the 15 lists, 13 have been profitable, and 10 have beaten the Standard & Poor’s 500 Index. The average one-year return on my recommendations has been 16.2 percent, compared with 8.7 percent for the S&P 500.
Keep in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Past performance doesn’t predict future results. And the returns from my column picks shouldn’t be confused with the performance I obtain for clients on actual managed portfolios.
My list from a year ago flopped. I didn’t foresee the big decline in the price of raw materials such as coal and iron, which caused BHP Billiton to drop 27 percent. Other losers I recommended were Mattel Inc. (MAT) and China Yuchai International Ltd. (CYD). Overall, my picks from a year ago declined almost 11 percent, while the S&P 500 advanced 9.5 percent.
I hope to get back on track this year with five new selections I believe have dividend appeal and are attractive in other ways.
I don’t believe the decline in the energy industry is over (despite a bounce during the past couple of weeks), but Chevron Corp. (CVX) looks to me like a relatively safe bet. It’s a huge, stable company and should be able to acquire troubled competitors in this downturn. Its dividend yield is 4.8 percent and it sells for 14 times recently depressed earnings. I suggest taking a half-position now and half in about three months.
HCI Group Inc. (HCI) is the fourth-largest property & casualty insurance company in Florida. I believe that investors, when they think of Florida, think of hurricanes. Naturally, that makes them skittish about Florida-based insurance companies. I believe the consensus opinion is too bearish on HCI. It has a reasonably consistent history of earnings growth, offers a 3 percent dividend yield and has increased its dividend at a clip of about 30 percent a year.
While it is vulnerable to storms, it lays off excess risk on 27 reinsurance companies with whom it works.
GameStop Corp. (GME) sells new and used video games and gaming equipment, in large part to young people in their teens and 20s. People perceive the business as faddish and, therefore, fragile. But GameStop’s results suggest otherwise. It has shown a profit in 13 of the past 15 years and has grown its book value (corporate net worth per share) at a 13 percent pace during the past decade.
The big threat, of course, is that gamers will eventually get all their games online and not need discs or special equipment. That could happen someday, but GameStop earned a 19 percent return on stockholders’ equity in the past 12 months. The dividend yield is 3.2 percent.
Cal-Maine Foods Inc. (CALM), the largest American egg producer, has a large number of short sellers betting on it to decline. I believe their reasoning is that the outbreak of bird flu is pushing up the cost of production. However, it appears to me that the shorts will not prevail, as Cal-Maine has been able to pass the increased costs on to consumers.
Cal-Maine has a strong balance sheet, with debt less than 6 percent of stockholders’ equity. The dividend has been rising rapidly and the dividend yield is now north of 7 percent.
Finally, as a high-risk speculation, I again recommend China Yuchai International (CYD). The company makes diesel and natural gas engines. It does engine repair, owns hotels and engages in real estate development.
It is risky for several reasons. Being in China is a risk factor. In addition, the Singapore-based company sometimes has a testy relationship with its mainland manufacturing affiliate.
But the dividend appeal is undeniable. The stock offers an 8.4 percent dividend yield, and the company has increased the dividend at a 32 percent annual rate in recent years.