Fat Dividends: Some are Iffy, Others are Beauties

by Bill Barnhart, YCharts

With the S&P 500 dividend yield back down to about 2 percent from an upward spike earlier this summer, it’s time to revisit YCharts effort to find “Ridiculous Dividend Yields.” The first installment, July 14, 2011, looked at GPS device maker Garmin (GRMN). In July Garmin’s nearly 5% yield played against worries about its long-term profit outlook now that mobile handheld devices are offering GPS service.Using the nonscientific ground rules set in July, I updated the YCharts screener tab for stocks more than $1 billion in market cap, dividend yields of 3% or better and revenue growth of at least 10%.

Some dividend yields cited in the Garmin column only got more ridiculous. Garmin fell off the screen, as its yield crept higher but revenue growth turned negative. Casket maker Hillenbrand (HI) saw its yield jump to 8% from just over 3% after revenue growth slid below the 10% benchmark. Nokia (NOK) saw its yield inch toward 8% as revenue growth dropped sharply. Ridiculous dividend yields as warning signs, right.

What the heck – let’s look for stocks paying nice dividends, but leave the ridiculous ones alone for now. Consider three non-financial stocks that pass our screen. They also have the distinction of being S&P 500 dividend “aristocrats,” (the term for S&P 500 companies that have increased dividends annually for at least the last 25 years). They are business services provider Automatic Data (ADP), global electrical equipment maker Emerson Electric (EMR) and paint and specialty chemicals supplier PPG Industries (PPG). All three pay a yield of about 3%, reflecting in part the recent stock market swoon.

PPG Industries Dividend Yield Stock Chart by YCharts

All three report solid trends of revenue growth north of 10%.

PPG Industries Revenue Growth Stock Chart by YCharts

Looking forward, chances of these companies’ dividend yields dropping below 3% are a lot greater than their revenue growth slipping below 10%. A couple of other companies from the latest “ridiculous” screen deserve a look, non-S&P 500 dividend aristocrats. Annual revenue growth at electronic connecting device maker Molex (MOLX) climbed more than 15% in the fiscal year 2011. The recent dividend yield was 4.5%.

Molex Dividend Yield Stock Chart by YCharts

Finally, Peru’s biggest copper producer, Southern Copper (SCCO), with a dividend yield of more than 7.5% and revenue growth of 55%, bears a look. Share prices have declined this year, reflecting anxiety about global copper demand. But the revenue growth curve has tracked closely with fellow copper miner Freeport-McMoran Gold & Copper (FCX), whose yield is just north of 2%.