The ‘winning formula’ for dividend investing, per Trivariate Research
There are some solid returns to be found in dividend stocks, but not all are created equal. For Trivariate Research, its “winning formula” focuses on large-cap stocks that grow their payouts. In fact, dividends are a durable return factor for stocks, founder Adam Parker said in a recent note. He highlighted an “investable universe” of 479 stocks, a cohort that has outperformed the top 700 equities on a 25-year and five-year timeframe. Stocks in this group have a market cap of at least $10 billion, a dividend yield that’s either greater than 10 basis points and growing or greater than 50 basis points. The median stock in this group currently grows its dividend 5% each year, the firm found. One basis point is equal to 0.01%. Breaking it down even further, Parker found that stocks in the two lowest payout ratio quintiles have performed best over the past five years and that dividend increases work best for high-cash and cheap companies. “Stocks with cash to market cap. above 25% and net cash to market cap. above 10% that increase their dividend massively outperform stocks that have less cash.” Parker noted. Those that are cheap — meaning their valuation is less than 10-times price-to-forward earnings — and that also boost their payouts outperformed the more expensive, dividend increasing stocks, he said. Lastly, lower payout ratio companies that raise their dividends “strongly outperform” their industry group following the announcement, Parker said. A payout ratio is a measurement of how much of a company’s earnings is paid out to its shareholders With that in mind, he came up with a list of stock ideas for dividend increasers in the lowest quintile of payout ratios over the last few months. Here are some that made the cut. Synchrony Financial , which has a 1.58% dividend yield, announced a 13% payout raise in April to 34 cents per share beginning in the third quarter. Brian Wenzel, the company’s chief financial officer, said in a statement that the increase, as well as a new share repurchase program of up to $6.5 billion, reflects “confidence in our execution and the opportunities we see to continue driving long-term shareholder value in the years to come.” SYF YTD mountain Synchrony Financial year to date Synchrony also reported adjusted first-quarter earnings that topped expectations, but its revenue fell short. The stock is down nearly 11% year to date. Travelers , on the other hand, has moved 4% higher so far this year. The insurance stock yields 1.64% and recently declared a 14% increase in its quarterly dividend to $1.25 per share. That marks the 22nd consecutive year of increases with a compound annual growth rate of 8% over that period, Travelers said. In April, the company reported first-quarter revenue and core earnings per share that topped expectations. “Over time and across a wide range of conditions, we have consistently delivered growth at industry-leading returns with low volatility,” CEO Alan Schnitzer said in the earnings release. “That performance reflects the strength of our capabilities across both sides of the balance sheet and a focus on creating shareholder value.” Lastly, Chubb also beat expectations when it reported last month. Despite the results, the stock dropped after the report as investors became spooked by signs of a softening property insurance market. The insurance company, whose stock has a dividend yield of 1.19%, announced its 33rd consecutive annual dividend increase in February to $4.08 per share, to be paid in four quarterly installments of $1.02 per share. The stock is up about 4% year to date.
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