Cato’s Hidden High Yield
In its most recent fiscal year, Cato delivered an extra $1-a-share dividend ahead of looming changes in the tax code, so don’t look for a similar payout this year. But if history is any guide, future annual dividends will be a lot closer to $1 a share, and not just the $0.20 a share that many websites will tell you.
The Dow Chemical Company (NYSE:DOW) is another example of a company positioned for robust dividend growth, thanks to an ongoing balance sheet transformation. The chemical giant had been carrying an ungainly balance sheet, as long-term total debt rose to $20.6 billion by the end of 2010.
Yet Dow now appears committed to shrinking that debt load: It’s already less than $17.5 billion and should sink below $15 billion over the next two years, according to management. As debt moves to more manageable levels, look for Dow to shift its focus toward dividends. The payout has already been boosted from $0.60 a share in 2010 to a current $1.28 a share (good for a 3.3% yield).
But the smaller debt load should enable Dow Chemical to double its payout ratio in coming years, setting the stage for a dividend yield above 6% (if you lock in at today’s stock prices).
Risks to Consider: We’re in the midst of a steady expansion in payout ratios, but companies tend to reduce their dividends when the economy contracts, as was the case in 2008. So keep an eye on the broader economic environment in which each of these companies operates.
Action to Take –> Certain industries predominate the “low payout ratio” theme. Banks and insurers, many of which are only now sufficiently capitalized to satisfy regulators, stand to pay solid attention to their dividends in coming years. The Chubb Corporation (NYSE:CB), Unum Group (NYSE:UNM), Assurant, Inc. (NYSE:AIZ) and Protective Life Corp. (NYSE:PL), for example, all have payout ratios below 20% (and typically trade below book value as an added value kicker).
If you’re in search of stocks that can offer robust dividend growth, simply calculate how much of their current earnings are geared toward the dividend. If the payout ratios are below 20%, and cash flow appears to be stable and growing, then you may be looking at some of the dividend stars of 2014.
This article was originally written by David Sterman and posted on StreetAuthority.
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