Saturday, January 25, 2014

Todd Wenning on Finding Differentiated Dividend Ideas

One of the good things about dividend investing is also a challenge. Dividend investing forces you to screen out many stocks, because they do not pay a dividend at all. And really, for most dividend investors, you are going to want at least a 2 or 3% yield. This hurdle dramatically thins the herd and you tend to see a lot of the same companies and same industries in the companies that clear the hurdle. That simplifies the research process, but it can also be a bit limiting. A well trodden path leads to utilities, energy, MLPs, REITS, is that all there is?

Todd Wenning has a post on a topic that I spend a lot of time thinking about Where to Find Differentiated Dividend Ideas. Beyond the basic screen, what can you look for? Todd has four ideas:

"1. Firms that have cut their dividends"
Holy counter intuitive Batman! While Todd's first idea sounds like heresy (in his words) at first, in fact it is a place worth exploring. Look no further than financial institutions coming out of the crisis. Wells Fargo raised its dividend by 90% over the last year to a current yield of 2.6% and yet the payout ratio is only 28%. This means the dividend can easily double over the next couple of years. It not just Wells Fargo, AIG, Bank of America, JP Morgan, and many other survivors are in a similar postion to grow their dividend over the coming years.

"2. Firms that are in the final stages of a deleveraging process"
See point 1

'3. Small Caps"
Todd has a series on Morningstar that is well worth your time for hunting ideas in small cap dividend space. I have never understood why people would limit their holdings to large cap only. Lots of great businesses are small, and any of them are easier to analyze than large caps. Innophos has annualized dividend growth of 13% over the past 5 years. Its deeply embedded in many necessary industries' supply chains. Should its $1B market cap really keep you from thinking about investing in Innophos?

"4. Spin offs"
Right out of the Joel Greenblatt playbook, Spin Offs are very good candidates for mispricings. Recent examples here include Phillip Morris (4.6% forward yield) and Kraft (4%).

One thing I would add to Todd's list is to consider foreign stocks. Most US investors limit their holdings to US companies, but expanding the search horizon to include international markets can yield good results. Many countries have more investor friendly dividend policies than US companies with higher payout ratios. On the down side, some countries impose extra taxes on dividends for foreign investors so you have to consider this as well. Still going a bit further afield is a good way to find great companies with good yields. For example, Brookfield Infrastructure Partners was spun out of Brookfield Asset management (a Canadian company) and owns assets all over the globe, things like toll roads in Latin America, dams, and so on. They have excellent management, pay out a 4.6% dividend yield, and they have a global focus meaning their managers can hunt anywhere for bargains. Individual investors should too.

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