4 stocks with growing dividends

By Jack Hough, Barron's

Stocks with fat payouts often come with problems. A smarter way to get nice income is to buy shares with modest but rising payouts.

Today's menu of investments that yield 8% and higher is short and not especially appetizing. Greek government bonds, anyone? Stock investors, however, can unlock surprisingly powerful yields through a combination of careful selection and patience.

The wrong way to proceed is to simply grab the market's highest yielders. Six companies in the Standard & Poor's 500 Index ($INX) now yield more than 6%. There's Pitney Bowes (PBI), which makes postage machines; R.R. Donnelley & Sons (RRD), a bulk printer; and a handful of rural telephone companies. All face declining sales, high debt or other challenges. Donnelley got a black eye just last week when Google (GOOG) blamed it for the premature release of its quarterly results.

A better way to get yield, especially now, is to identify companies that pay modest dividends today but look likely to pay much larger ones in years to come.

Over the long haul, stocks with rising payouts have delivered better total returns than dividend payers as a whole.

For example, 10 years ago Darden Restaurants (DRI), owner of the Olive Garden and Red Lobster chains, paid shareholders a 4-cent quarterly dividend. Based on the $19 share price at the time, that worked out to an unexciting yield of about 0.8%.

Darden, however, has steadily increased its dividends since then and pays 50 cents per quarter. Shares yield 3.7%, which is handsome enough compared with the S&P 500's yield of 2.1%. But the investor who bought 10 years ago is collecting a yield of over 10%, calculated against his original price. He has been well-rewarded for the wait, and not just in dividends. The rising payments have helped Darden's stock price nearly triple, trouncing the S&P.

That's part of a broader trend of rising dividends paying off for investors. According to a study by mutual-fund company T. Rowe Price, $100 invested in the Russell 1000 Index ($RUI) at the end of 1978 would have grown to $4,055 by this past July. Invested in only the index's dividend-payers, it would have turned into $4,573. And invested in only the dividend-growers it would have become $5,244.

Now may be an especially good time to favor companies whose dividends are modest but have plenty of potential for growth. With the baby boomers entering retirement and looking to draw more income from their investments, and bond yields sitting near historic lows, investors have piled into dividend stocks. That has left shares of big payers looking pricey. Among S&P 500 dividend-payers, those that spend more than half their profits on dividends recently traded at a median of 16.3 times earnings, versus 13.9 times for those that pay less than half.

At the same time, all that demand for dividends has made companies more willing to part with payments. The number of S&P 500 members that pay dividends, 403, is the highest since 1999, according to Howard Silverblatt, the Standard & Poor's analyst for its indexes. Index members have increased dividend spending by $38.4 billion so far this year, versus $34.5 billion during the same stretch last year. There's plenty of room for more growth: The companies are paying out only around one-third of earnings as dividends, versus a historical average of more than half.

The four companies on the table below have dividend yields that aren't the largest around. However, the amounts that Wall Street analysts predict each will pay by 2014 work out to plumper yields when calculated against today's price. And these companies have potential to keep increasing their payments for much longer, judging by the low portion of earnings each now pays.

Like many banks, Wisconsin-based Associated Banc-Corp (ASBC) slashed its dividend payment following the global financial crisis but has begun to rebuild it. Quarterly results, reported Thursday, show gains in lending, deposits and earnings per share.

Coca-Cola Enterprises (CCE) has a sturdy product line but its market, Western Europe, has been wobbly of late. Wall Street expects revenues for the company to dip 2% this year before rising 5% next year. But there's a perk for patient investors: The stock is 30% cheaper than Coca-Cola (KO) based on earnings.

IBM (IBM) shares shed 8% this past week after a Tuesday quarterly report in which the tech giant missed revenue forecasts. A weak euro and slow economic growth cut into results, but management stood by its full-year earnings guidance, suggesting it expects a healthy pace of late-year orders. The sell-off presents a buying opportunity for long-term investors, given IBM's record of driving profits and dividends steadily higher over the past decade.

Stryker (SYK) makes artificial knees and hips. It missed earnings per share estimates by a penny this past week and said full-year earnings would likely increase 8%, down from its previous guidance of 10%, citing a slowdown in Europe and some product recalls. Over the long term, however, Stryker is benefiting from rising average ages in developed markets (and ballooning body weight). It also holds net cash equal to about 8% of its stock-market value. 

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How a bad economy helps stocks

By Anthony Mirhaydari, MSN Money

Doubts about the rebound are rising yet again, but don't let that scare you away from investing. Those doubts will be good for stocks and gold -- for a while.

You don't have to look very far to find things to worry about.

Yet, after largely going quiet since February, stocks and other risky assets -- including junk bonds, copper and precious metals -- have started perking up like wildflowers. This is despite sour investment sentiment and building evidence of a new slowdown in the global economy.

What gives? And can this new strength continue in the face of such dire threats?

It all depends on what the Federal Reserve announces at its June policy meeting. Wall Street is betting that in less than two months, Fed Chairman Ben Bernanke will unveil a third round of quantitative easing or "QE3" -- essentially pumping cheap, newly printed cash into the financial system -- to follow up on the "QE1" effort started in late 2008 and the "QE2" effort teased in the summer of 2010.

You can see this in the way the U.S. dollar is being eviscerated, dropping below its multimonth trading range. That's pushing traders into assets helped by a weak dollar, like gold and silver and the related mining stocks -- areas that have largely been ignored since early 2011, when the dollar stabilized. The catalyst for that was renewed confidence in America's vigor after Osama bin Laden's date with destiny. Nothing like a righteous kill to boost confidence.

In the twisted reasoning that passes for logic in the markets these days, as long as the dollar stays weak -- ostensibly through additional Fed stimulus -- stocks and metals should march higher. And as long as that happens, you shouldn't be scared out of the market despite the storm clouds on the horizon.

Once that changes -- say, due to a Greek exit from the eurozone, a deepening of the problems Spain faces or a nasty new debt-ceiling debate here at home -- there'll be hell to pay as the dollar strengthens.

But right now, despite the economic mess, we're due for a brief upswing. Here's why.

As all this is happening, some serious, scary fundamental problems are being shrugged off -- problems that will be obvious once the short-term sugar rush the Fed's stimulus fades. Each iteration of QE only strengthens the nasty side effects of those efforts -- rising inflationary pressures, weaker real wages and higher prices at the pump -- while the benefit diminishes.

Europe is a mess, as the likes of Spain and Britain have fallen back into recession while its fragile banking system edges toward the precipice. The Spanish sovereign credit rating was recently cut to "junk" by analysts at Egan Jones. Food and fuel prices remain troublingly high. Social unrest is heating up again as winter's chill fades -- in Europe, in Asia and here at home.

China is suffering from a drop in exports, to Europe and elsewhere, as it tries to manage the end of a housing and debt bubble.

In the United States, various leading indicators of growth -- from industrial production activity to recent labor market data to the drawdown in the personal savings rate -- suggest trouble. And we have to contend with the "fiscal cliff" Washington is speeding toward like a drunken driver toward a Jersey barrier. (See "U.S. barrels toward a fiscal cliff.")

This week, both the Chicago and Dallas Fed manufacturing reports came in under expectations. The Chicago PMI fell to its weakest level since November 2009 on a drop in orders and production. The Dallas report fell to its weakest level since last September on a drop in factory utilization, orders, employment and production.

With the economy puttering along at just 2.2% growth, tax hikes and spending cuts worth nearly 4% of the gross domestic product await in early 2013. That could tip us back into recession.

There are other, deeper problems, too. Such as the drop-off in the labor participation rate to early 1980s levels as people give up looking for work. Or how Washington has failed to address the looming demographic problem facing Social Security and Medicare as more and more seniors are supported by fewer and fewer young taxpayers. Or how the corporate sector is hoarding cash and withholding investment -- causing labor productivity to stall and threatening future economic growth, according to JPMorgan economists. This will have long-term consequences.

These are serious problems with no easy answers. The root of the problem, as I've said before, is too much debt in the West combined with aggressive trade mercantilism and fierce competition for new jobs from the East.

Until these issues are resolved, the "recovery" will continue to disappoint, with lots of corporate profits but languid job growth and salary gains. Earnings multiples will likely contract, according to Morgan Stanley strategists -- which means lower stock prices as earnings volatility and subdued growth take a toll on investor confidence. While the market is trading near its long-term average price-to-earnings ratio, history shows it doesn't trade near this level for long, as the pendulum of sentiment swings from greed to fear and back again.

Inflation will also become a bigger and bigger problem as the Fed's stimulus efforts mix with structural impediments to faster GDP growth, from a higher "natural" unemployment rate to weak labor productivity and minimal capital investment by businesses.

Continued on the next page. Stocks and funds mentioned include Apple (AAPL), PowerShares DB Commodity Index Tracking (DBC), iShares FTSE China25 (FXI), iShares MSCI Emerging Markets (EEM) and iShares MSCI Hong Kong (EWH).

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10 stocks to own for the long term

By Jim Jubak

Buy and forget is not a viable strategy in a volatile market. But with periodic tweaking, a portfolio can capitalize on long-term global trends.

Ten long-term picks for 2013? In this market? You've got to be kidding. There's just too much volatility.

Precisely. Which is why long-term investing can make sense in this market. All that volatility can give you opportunities to buy great long-term stocks when everybody else is -- for the moment -- running for the hills.

But . . . and it's an important "but" . . . the kind of long-term investing I'm talking about isn't buy and forget. It's not even exactly like traditional buy and hold.

I'd call it buy rarely and sell seldom. But do pay attention to the potential for wild swings in a market ruled by central bank cash flows.

I don't think it matters a whole lot whether you use something as traditional as dollar-cost averaging or a more complex system of market timing. The key is to find stocks of good companies that are positioned to ride trends of 10 years or more. You buy more shares when the companies are out of favor. You sell completely when the company shows signs of losing its way or when the trend itself changes.

If you want to increase your potential returns, you can sell partial or entire positions when the fundamentals say a stock is overvalued or when technical analysis says momentum is fading.

This is the system behind my December 2008 book "The Jubak Picks" (still available from places like Amazon.com and Powell's Books (powells.com). Since January 2009, I've run a portfolio built on this system. Every year, I've done an update, buying five new stocks and selling five old picks out of the 50-stock portfolio.

The update for 2013 is a little late this year -- May 3 -- but in this column you'll find this year's five buys and five sells.

Jim Jubak

And you'll find something a little different too -- a continuation and extension of something that I introduced into the portfolio in January 2012. In that update I not only gave my five buys and five sells -- but also picked the five stocks from the portfolio that I thought would perform best in 2012. In essence I created a list of 10 long-term buys for the year out of the larger 50 stock long-term portfolio.

In this piece you'll find my 10-long-terms buys (five new buys and five picks from the existing portfolio) for 2013.

Before I go into a summary of this system and the specific buys and sells, let me give you some performance numbers. After all, why pay any attention to this system if the results are terrible?

For the life of that total portfolio -- that's the whole 50 stocks, taking into account annual revisions -- the Jubak Picks 50 has returned 64.4%. That trails the 72.3% return on the Standard & Poor's 500 Index ($INX). The problem? The kind of volatility that has driven so many long-term investors either to other strategies or out of the market completely.

In 2011 commodity prices tanked, and that took the Jubak Picks 50 down, too. The return on the portfolio that year was a loss of 18.6% against a gain for the S&P 500 of 2.1%.

It was exactly that volatility that drove me in January 2012 to create and track an annual portfolio of 10 long-term picks from the larger portfolio. Since the beginning of the Jubak's Picks 50, I'd been advocating that investors occasionally buy and sell inside that larger portfolio, depending on market conditions. But I hadn't given any specific picks to help guide the transactions.

In January 2012, I did. The return on that portfolio of five new buys and five best picks from the existing portfolio came to 16.6% in 2012. That slightly beat the 16% return on the S&P 500 for the year, and it hands-down beat the 6.6% return for the Jubak Picks 50 as a whole.

So with that setup, let's get down to the portfolio and the 10 long-term picks for 2013.

I'm not going to rehash the strategy behind the Jubak Picks 50 here. In a nutshell, the idea was to see if a buy-and-hold-ish strategy would pay even in times of extreme stock-market volatility.

The premise of my book was that by picking trends with long life spans (10 years or more) -- such as the growing demand for food and especially protein as developing economies get richer -- a buy and hold investor could beat the market even if the individual picks used to buy into those trends were sometimes clunkers.

Because markets and companies do change, I'd tweak the portfolio once a year. But not with a very big tweak. I'd sell no more than 10% of the portfolio (five stocks) and buy no more than 10% (five stocks) of the portfolio. For more detail on how the portfolio is built you can see last year's post or dig up a used copy of my book.

In the January 2012 revision, I dropped Central European Distribution (CEDCQ), Deltic Timber (DEL), Encana (ECA), First Solar (FSLR) and Kinross Gold (KGC). The 2012 results for those stocks were, respectively, -50.4%, +17.4%, +11%, -8.6% and -13.3%. The average loss for those five drops was 8.8%.

In the January 2012 revision, I added Home Inns and Hotels Management (HMIN), Lynas (LYSDY), Pioneer Natural Resources (PXD), Weyerhaeuser (WY) and Yamana Gold (AUY). The 2012 results for those added stocks were, respectively, +12%, -43%, +19.2%, +52.3% and +18.8%. The average gain was 11.9%.

Finally, in the January 2012 revision, I picked five stocks from the portfolio that, in my opinion, would be the best performers of 2012. They included Cemex (CX), Freeport-McMoRan Copper & Gold (FCX), General Cable (BGC), Gol Linhas Aereas Inteligentes (GOL) and Potash of Saskatchewan (POT). The 2012 results for those picks were, respectively, +90.4%, -3.8%, +21.6%, -1.1% and -0.1%. The average gain was 21.4%.

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