Dividend investors are getting paid more to wait for a full-blown recovery these days.
Big dividend increases from tech bellwether Microsoft and defense giant Lockheed Martin serve as yet another sign that corporate balance sheets in the U.S. remain strong and flush with cash. It’s also a reminder that investors in dividend-paying stocks can reap the benefits of a steady income stream in the face of challenging markets.
On Tuesday, Microsoft's board raised the company's quarterly dividend by four cents, or 25%, to 20 cents a share, boosting the yield to 3%. Lockheed Martin followed suit on Thursday, raising its quarterly dividend to $1 a share from 75 cents a share, a 33% increase. Shares of Microsoft and Lockheed Martin represent a 2.16% and 2.14% weight, respectively, in the
Allianz NFJ Dividend Value Fund, as of August 31, 2011. The total number of dividend increases in the fund in 2011 now stands at 24 year-to-date, as compared to only one decrease.
“Microsoft’s move to increase its dividend is emblematic of the good things that happen when companies produce a lot of free cash flow and have big net cash balances,” says Burns McKinney, managing director and portfolio manager at NFJ.
Further, Microsoft’s dividend increase effectively widens the spread between its dividend yield and the yield on Treasurys. “The yield will now be well above government bond yields, and Microsoft is now a far better credit given that it set a record for low interest on its last bond offering,” McKinney says.
Dividend increases have stormed back in 2011 with 887 companies raising their dividend and only 35 lowering their dividend, a ratio of 25:1. That is a marked turnaround from a roughly 1:1 ratio in 2008. When taken in tandem with the Fed’s recent decision to keep interest rates pegged at zero for the next two years, getting out of cash and Treasurys and into dividend-paying stocks may be a prudent risk to take and a good opportunity to earn income.
For companies, raising dividends is a good way to attract shareholders and bolster the stock price, especially when opportunities to reinvest in the business are scarce against a backdrop of a low economic growth. And with interest rates on bonds and cash equivalents so low, many investors are starved for investment income. Rising dividends could help fill that gap—and compel more investors to boost their equity exposure.
For its part, NFJ tends to invest in stocks with low price-to-earnings ratios (P/E) that are out of favor but fundamentally sound, like Microsoft. From a valuation standpoint, the stock is still relatively cheap, McKinney says. Net of cash, it is currently trading at an attractive forward P/E multiple of 9.81. Microsoft’s product pipeline is in good shape too. “Windows 7 is selling better than any prior version, while Windows 8 holds great promise as well,” McKinney says.
More and more technology companies—long proponents of share repurchases—are looking to institute or raise their dividends, which expands the universe of dividend payers beyond the traditional sectors known for dividends: health care, financials, utilities and energy.
“The [Microsoft] dividend increase simply gives credence to what we've been saying: all of this cash on balance sheets will burn holes and wind up somewhere,” McKinney says. “Sometimes with increased, capital-destroying acquisitions, sometimes poorly-timed repurchases, and in the cases of companies with track records of paying and raising dividends, we'll see more cash returned to shareholders. That's what we like to see.”
Dividend Hikes
Allianz NFJ Dividend Value Fund holdings that have raised their dividend in 2011, through Sept. 22.
| |
|
|
(Dividend/Cents per Quarter) |
|
| LMT |
Lockheed Martin |
9/22/2011 |
1.00 |
0.75 |
33.00% |
| MSFT |
Microsoft |
9/20/2011 |
0.20 |
0.16 |
25.00% |
| HRS |
Harris |
8/2/2011 |
0.28 |
0.25 |
12.00% |
| MDT |
Medtronic |
6/23/2011 |
0.245 |
0.225 |
7.78% |
| PEP |
PepsiCo |
5/4/2011 |
0.515 |
0.48 |
7.29% |
| JNJ |
Johnson & Johnson |
4/28/2011 |
0.57 |
0.52 |
9.62% |
| CHK |
Chesapeake Energy |
4/27/2011 |
0.875 |
0.75 |
16.67% |
| TRV |
Travelers Cos. |
4/27/2011 |
0.41 |
0.36 |
13.89% |
| INTC |
Intel |
4/27/2011 |
0.21 |
0.1812 |
15.89% |
| NOC |
Northrop Grumman |
4/27/2011 |
0.50 |
0.47 |
6.38% |
| AMP |
Ameriprise |
4/27/2011 |
0.23 |
0.18 |
27.78% |
| CVX |
Chevron |
4/27/2011 |
0.78 |
0.72 |
8.33% |
| IBM |
IBM |
4/26/2011 |
0.75 |
0.65 |
15.38% |
| GE |
General Electric |
4/21/2011 |
0.15 |
0.14 |
7.14% |
| KMB |
Kimberly-Clark |
4/21/2011 |
0.70 |
0.66 |
6.06% |
| WFC |
Wells Fargo |
4/20/2011 |
0.12 |
0.05 |
140.00% |
| PNC |
PNC Financial |
4/8/2011 |
0.35 |
0.10 |
250.00% |
| IP |
International Paper |
3/29/2011 |
0.2625 |
0.1875 |
40.00% |
| INTC |
Intel |
3/18/2011 |
0.1812 |
0.18 |
0.67% |
| ALL |
Allstate |
2/22/2011 |
0.21 |
0.20 |
5.00% |
| RAI |
Reynolds American |
2/16/2011 |
0.53 |
0.49 |
8.16% |
| COP |
ConocoPhillips |
2/11/2011 |
0.66 |
0.55 |
20.00% |
| PBI |
Pitney Bowes |
2/9/2011 |
0.37 |
0.365 |
1.37% |
| TWC |
Time Warner |
1/27/2011 |
0.48 |
0.40 |
20.00% |
Source: Morningstar. Data as of 9/22/2011. There is no guarantee that dividend-paying stocks will continue to pay dividends. Only one portfolio holding, Hudson City Bancorp, decreased its dividend, on 4/20/2011 from 0.15 to 0.08.
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