There's plenty of reason to be sore about those dividend cuts:
Mind-blowingly thorough research from Wharton professor Jeremy Siegel
shows that dividends are a crucial driver of long-term market outperformance.
But rather than spend the rest of this recession hiding under a
rock, we dividend-loving investors can profit. Yes, many companies are
cutting their dividends, but there are plenty of stocks not only
maintaining their dividends, but growing them -- 34 in September alone!
Spotting the long-haul winners
As we've
seen, cuts happen. But fortunately, identifying dividend payers with
sustainable, growing payouts isn't exactly rocket science. You just
need to know what you're looking for.
Companies with long, uninterrupted histories of dishing out dividends typically share these three traits.
1. They consistently rake in cash.
Healthy
dividends are funded with free cash flow, which means that prodigious
cash generation and dividend safety go hand in hand. Dividend-dealers Coca-Cola (NYSE: KO) and Monsanto (MON), for example, convert about 19% and 16% of revenue into free cash, respectively.
2. They aren't cyclical.
During boom
times, profits in a cyclical industry flow like a Saudi oil well, often
leading management teams to overcommit to high dividends and
significant expansion. Picture miners, dry bulk shippers, and
homebuilders, among others.
When a cyclical industry tightens up (and such industries always do), cash profits follow suit, and once-high dividend payouts quickly find themselves on the chopping block.
3. They are conservatively capitalized.
Even
well-run companies that aren't in cyclical industries can occasionally
find themselves on the outs. Look for companies that consistently
produce operating profits well in excess of their debt obligations. By
looking out for companies that demonstrate these qualities, you're
setting yourself up to find the next great dividend winner.
A company that recently caught my eye -- and that demonstrates these three qualities -- is Motley Fool Income Investor recommendation Waste Management, the largest player in the trash game.
Trash and cash
Waste Management operates
in a pretty mundane industry. But your trash is Waste Management's
cash. The company turns a solid 9% of its revenue into free cash flow
and pulls in operating profits nearly five times the size of its
interest expense.
And while declines in industrial trash collection have slowed
growth, those of us who routinely lug our trash to the curb can attest
that demand for residential trash collection is extremely consistent.
Owning shares of Waste Management is a bit like having a stake in a
collection of small near-monopolies. Building a landfill requires a lot
of cash, involves miles of red tape, and incites intense blowback from
the locals. These challenges keep competition at bay and have helped
lead to consolidation and better pricing in the industry.
It gets better
For starters, there's no
real chance that technological obsolescence will undercut Waste
Management's service offering. Similarly, unlike a Research In Motion (Nasdaq: RIMM),
Waste Management doesn't have to spend a huge chunk of its coin on
research and development on an ongoing basis. Waste hauling is as
static a business as it is boring -- and that's a good thing.
And unlike with oil, gasoline, and other high value-to-weight
commodities, it doesn't make economic sense to haul trash over long
distances. That means you don't have to worry about distant competition
threatening your localized pricing, as it often does in other
industries. Think about your local radio station before the satrad Sirius XM Radio (Nasdaq: SIRI) boys rolled into town, or your local used book dealer in the days before Amazon.com (Nasdaq: AMZN).
Dumping it all together
There's a lot to
love about such sturdy, growing dividend payers -- just ask one of
Waste Management's largest investors, Bill Gates. Waste Management is
typical of most Income Investor recommendations: strong, well-managed, and boasting healthy cash flows and a sustainable dividend.
On the surface, there isn't much pizzazz to dividend-focused investing, but as Jeremy Siegel's research and Income Investor's results have shown, the strategy is a proven winner.
© 2009 UCLICK, L.L.C.
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