Are you looking for dividend stocks but don't want to chase performance? It's not easy to find them, considering so many have risen so much this year.
So we've identified six possible value dividend stocks in the S&P 500 Index (.SPX). The companies pass some screens for quality — more on that below — yet their shares have declined this year.
End your yield drought
There has been a pullback for the S&P 500 utilities and telecommunications industries (which feature stocks with high dividend yields) after price-to-earnings valuations rose to very high levels.
But the trend has still been up, with the utilities sector returning 10.2% so far in 2016, in line with the telecommunications sector's 10.1% return. The benchmark S&P 500 has returned 6.2% (through Oct. 14). The big theme for large-cap U.S. stocks this year has been the flight to yield and to lower volatility, as income-seeking investors have fewer options in the seemingly eternal low-interest-rate environment.
So we thought it would be useful to look at which dividend stocks have not risen this year, and then apply a few screening filters to narrow a list of companies for further research and possible investment. You might be asking: Why buy a stock that is down for the year? The answer: Value-fund managers do it all the time, as potential gains might be higher than for stocks that have already been bid up.
Starting with the S&P 500, 106 stocks had dividend yields of at least 3% as of Dec. 31, 2015, according to FactSet. One can split hairs when defining "dividend stocks," but we felt 3% was a large enough yield for a company to be included in the list.
Among the 106 stocks, prices were up for 83 of them during 2016. That left us with 23 S&P 500 dividend stocks that are down for the year.
Here's how we filtered them:
- We excluded three companies that cut or eliminated regular dividends during the first three calendar quarters of 2016. We kept Darden Restaurants Inc. (DRI) even though its dividend declined by 10% in January and stayed at that level in April, because the company's quarterly payout is now greater than it was a year ago.
- We excluded four companies whose current dividend yields exceed their free cash flow yields. A company's free cash flow is its remaining cash flow after capital-spending commitments. We can calculate the free cash flow yield by dividing the past 12 months' free cash flow per share by the current share price. If the free cash flow yield is higher than the dividend yield, the company has "headroom" to raise the dividend, buy back shares, expand or use the money for some other purpose. The idea is that headroom makes a company less likely to be forced to cut its dividend.
- We reviewed sales per share for the remaining companies, with the idea that in a slow-growth economy, sales growth is a telling sign. We used sales per share, rather than revenue, because the per-share numbers bake in any decline in the share count from buybacks, or dilution from issuance of additional shares for executive compensation, acquisitions or for any other reason. Among the 16 remaining companies, only six have reported rising sales per share over the past 12 months, from the previous 12-month period.
Here are the remaining six S&P 500 dividend stocks that are down so far in 2016, ranked by dividend yield:
|Company||Ticker||Industry||Dividend yield||Free cash flow yield - past 12 months||'Headroom'||Price change - 2016 through Oct. 14|
|HCP Inc.||HCP||Real Estate Investment Trusts||6.35%||8.33%||1.99%||-6%|
|Ford Motor Co.||F||Motor Vehicles||5.04||28.28||23.35||-18|
|Kohl’s Corp.||KSS||Department Stores||4.58||16.62||12.04||-9|
|FirstEnergy Corp.||FE||Electric Utilities||4.57||6.15||1.58||-1|
|People’s United Financial Inc.||PBCT||Savings Banks||4.38||6.36||1.97||-4|
|Darden Restaurants Inc.||DRI||Restaurants||3.60||8.02||4.42||-2|
For real estate investment trusts, we used funds from operations (FFO) per share, rather than free cash flow, to calculate headroom. Most REITs use FFO, a non-GAAP measure, to gauge dividend-paying ability. FFO adds depreciation and amortization back to earnings, while excluding gains or losses on the sale of real estate.
Here's the group again, showing growth of sales per share over the past year:
|Company||Ticker||Sales per share - past 12 months||Sales per share - year earlier||Increase in sales per share|
|Ford Motor Co||F||38.91||35.58||9.37|
|People's United Financial Inc.||PBCT||4.72||4.58||3.15|
|Darden Restaurants Inc.||DRI||54.16||53.52||1.18|
The first three companies have shown impressive sales growth over the past 12 months, their dividend yields are attractive and they have plenty of headroom for dividend increases.
So why are investors down on them this year?
HCP Inc. (HCP) is included among the S&P 500 Dividend Aristocrats, a list maintained by S&P Dow Jones Indices of more than 50 S&P 500 companies that have increased regular dividends for at least 25 straight years. The company is heading into a major transition as it spins off its ManorCare subsidiary to exit the skilled-nursing and assisted-living facilities business and focus on senior housing, life-science facilities and medical offices. Many analysts have price targets based on "sum-of-the-parts" analysis, below the current share price.
Ford Motor Co. (F) has a very impressive free cash flow yield, and the company's management proved its long-term mettle by avoiding filing for bankruptcy during the financial crisis, as its two main domestic competitors did. The company's sales have grown nicely over the past 12 months. But there are signs that the growth cycle for car sales is coming to an end, which could keep pressure on the shares for some time, even if the dividend appears safe. Shares of Ford trade for just 6.9 times the consensus 2017 earnings estimate of $1.73 a share, among analysts polled by FactSet. That compares to a weighted forward price-to-earnings ratio of 16.1 for the S&P 500 and 7.8 for the S&P 500 automobiles and components industry group.
Share repurchases have helped Kohl's Corp. (KSS) show impressive growth in sales per share over the past 12 months. But looking at the raw numbers, revenue for the quarter ended June 30 was down 2%, while comparable-store sales were down 1.8%. That left investors disappointed, although the shares have rallied lately. With the shares trading for 10.6 times the consensus 2017 earnings estimate of $4.13 a share, Kohl's is valued well below its S&P 500 multi-line retail industry group, which trades at a weighted 13.4 times 2017 estimates, according to FactSet.
As you can see, some extra research on your part is required before jumping in. There are some very attractive dividend yields on the list, but in order to consider an investment, you need to understand a company's business and then form an opinion about its chances of continued success over the next decade or more.