Dividend appeal, take 2
Few investors realize that about 40 percent of the stock market's total return is, directly or indirectly, because of dividends. The direct contribution is obvious, a return of about 1 percent to 6 percent per year directly into your pocket. When the market roars, such returns may seem trivial, but when it limps, those dividend checks look pretty good.
The indirect portion is what people fail to see. If dividends are reinvested in your stock portfolio, the money from them compounds with the market's gains.
Dividends are useful as a sincerity barometer on management's outlook. Most executives put a rosy cast on their forecasts. But if a company is hiking its dividend, you know that it believes earnings momentum is sustainable.
That's why, about once a year since 1998, I have published a list of stocks with dividend appeal — an above-average yield coupled with good dividend growth during the past five years.
Today's list is the 14th one. Twelve of the past 13 have been profitable, and 10 of them beat the Standard & Poor's 500 Index.
The average one-year total return on my dividend appeal stocks has been 18.9 percent, compared with 8.2 percent for S&P 500.
Bear in mind that the performance of my column recommendations is hypothetical and doesn't reflect trading costs or taxes. Past performance doesn't predict future results. And the results of my column picks shouldn't be confused with returns on actual portfolios I manage for clients.
My last list fell short of the mark. The five stocks I recommended for their dividend appeal a year ago showed an average total return of 15.6 percent, versus 17.5 percent for the S&P.
Cliffs Natural Resources Inc. (CLF), an iron ore miner, was the culprit. It fell 49 percent, even taking dividends into account. Decreased demand from China was the main reason for the fall.
More successful were Molex Inc. (MOLXA), a maker of electronic parts, which returned 85 percent, and Meredith Corp. (MDP), a magazine publisher, which returned 41 percent.
Two of my recommended stocks, Terra Nitrogen Co. (TNH) and Diamond Offshore Drilling Inc. (DO) barely budged.
Here are my newest five stocks with dividend appeal.
Gannett Co. (GCI), a newspaper chain, offers a 3.1 percent dividend yield. It cut its dividend during the Great Recession but never eliminated it and has increased it twice in the past four years.
In addition to USA Today and 81 other daily newspapers, Gannett owns 20 television stations and dozens of websites, some affiliated with its newspapers and some not. It looks good to me at 13 times trailing earnings and nine times estimated 2014 earnings.
Golar LNG Ltd. (GLNG), a Bermuda company that trades on the Nasdaq, processes, transports and trades liquefied natural gas (LNG). It owns a small but growing fleet of LNG tankers.
Golar offers a dividend yield of 4.9 percent and has raised its dividend a couple of times in the past two years.
Where once people thought of LNG mainly in terms of how much the United States might import, investors' thoughts have turned to how much LNG this country might export.
Delek US Holdings Inc. (DK) is the U.S. affiliate of an Israeli company, Delek Petroleum Ltd. It is chiefly a refiner, with refineries in Texas and Arkansas. It operates pipelines and runs convenience stores under several brands, including Mapco Express and Fast Food & Fuel.
I consider most U.S. refining stocks undervalued. Delek has more dividend appeal than most. It yields 4.1 percent in dividends and frequently declares special dividends in addition to its regular quarterly ones.
If you can stand the risks associated with investing in Latin America, you might be interested in Alto Palermo SA (APSA), an Argentine company that builds, owns and operates shopping centers. The shares trade in the United States as American Depositary Receipts (ADRs).
Alto Palermo has one of the highest dividend yields around — over 9 percent. That is partly to compensate investors for the facts that the Argentine economy has been slowing down, and there are whiffs of inflation in the air.
Alto Palermo sells for 10 times earnings, an attractive ratio. However, the balance sheet seems a little weak. This is probably my riskiest pick this week.
For my final selection, I choose IAMGOLD Corp. (IAG), a Toronto-based gold and metals miner that trades on the New York Stock Exchange. Its dividend yield is above 5 percent, and it has increased its dividend twice since the end of 2010.
It's hard to tell which way gold mining stocks will go, but they are at a low ebb compared to gold bullion, and bullion has come down a good way from its high. The chances of a rebound seem good to me.
John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist. He can be reached at firstname.lastname@example.org.