5 Dividend Rock Stars With Enticing Valuations
Jul 4th 2012 7:08PM
Updated Jul 4th 2012 7:10PM
Bottom-of-the-barrel interest rates are leaving income investors feeling cheated. A pitiful 1% one-year CD rate does nothing to help pay for groceries, gas, and medicine. And with no sign of interest-rate recovery in sight, now is a good time to consider steady, dividend-paying stocks.
I took a look at the dividend-paying landscape and liked what I saw in these five companies. I screened for a current dividend yield of at least 3%, positive five-year dividend growth, a payout ratio of less than 50%, and a five-star (out of five) rating from our Motley Fool CAPS community. I also screened for stocks I thought were attractively valued.
High-growth companies generally have low payout ratios. As they mature, they typically return more of the earnings back to investors and increase the payout ratio. By vetting for ratios less than 50%, I attempted to find companies that still had an opportunity to increase their dividend in the future.
Current Dividend Yield
5-Year Dividend Growth Rate
Forward P/E Ratio
5-Year Expected PEG Ratio
|Applied Materials (NAS: AMAT)||3.3%||7.7%||31%||9.54||1.49|
|Emerson Electric (NYS: EMR)||3.6%||7.1%||47%||11.42||1.18|
|Intel (NAS: INTC)||3%||13%||33%||11.80||1.00|
|Sysco (NYS: SYY)||3.7%||4.4%||41%||14.48||2.61|
|Veolia Environnement (NYS: VE)||6.1%||0.3%||NM||10.02||1.03|
Sources: Yahoo! Finance, The Motley Fool. NM = not meaningful because of negative trailing earnings.
It's rare to find tech companies that pay hearty dividends, but both Applied Materials and Intel do. Both tech giants have grown their dividends over the years and still have room to further increase yields, given their 31% and 33% respective payout ratios. Both stocks trade at sweet valuations.
With 80% of the microprocessor market share, chip giant Intel's semiconductors are inside the vast majority of mobile devices and hard drives on the planet. Intel transforms hunks of plastic and wires into lightning-speed research and communication tools. And Intel relies on companies like Applied Materials to help it crank out more chips. One of our analysts feels so strongly about Intel he thinks it's the cheapest stock on the Dow.
Applied Materials, the world's largest semiconductor equipment manufacturer, should continue to benefit as more consumers demand tablets and smartphones. As competition for these devices fosters price drops, more individuals can afford them, creating more potential business for Applied Materials. And the company is setting itself up to shine long-term from its solar-equipment operations, which it plans to relocate from Switzerland to China in an effort to lower labor costs.
Industrial goods and services company Emerson Electric pays a generous 3.6%, and its yield has increased every year for 54 years. The company recently cut its fiscal 2012 fourth-quarter outlook for revenue because of unfavorable foreign exchange fluctuations, but it reiterated its earnings guidance. I don't foresee a negative impact on Emerson's dividend or its valuation -- the company does a good job adjusting operations to manage cash flow and earnings.
Food-service powerhouse Sysco benefits from our trend toward eating food prepared away from home, which represents roughly 49% of food purchases, compared with half that figure 50 years ago. The food-service industry is fragmented, but Sysco's massive scale positions it nicely for further market-share gains. Sysco has never missed or lowered a dividend in its 41-year dividend-paying history.
French utility company Veolia Environnement's blockbuster 6.1% dividend yield makes this company attractive. Veolia recently announced that it will divest most of its regulated water unit in the U.K. The sale is part of the company's strategy to scale back the number of countries in which it operates and to cut its debt to below 12 billion euros by the end of 2013. Lower debt levels will probably yield more free cash flow, allowing Veolia wiggle room to possibly increase its already-generous dividend.
If you're looking for dividend stocks that trade at enticing valuations, then these fab five fit the bill. Or if you just have enough cash to buy one, I'd go with Intel. But don't take my word for it. Do your own research.
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At the time this article was published Fool contributor Nicole Seghetti owns shares of Applied Materials, Emerson Electric, and Intel. She welcomes you to check out what she's keeping her eye on by following her on Twitter, @NicoleSeghetti. The Motley Fool owns shares of Intel. Motley Fool newsletter services have recommended buying shares of Sysco, Intel, Veolia Environnement, and Emerson Electric. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.
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