Today I thought I’d start with a chart.
This chart, created by The Prudent Speculator based on data from Eugene T. Fama and Kenneth R. French, shows the long-term performance of dividend-paying and non-dividend-paying stocks. As you can see, over the long term, dividend-paying stocks have demonstrated both higher returns and lower volatility. And the larger the dividends, the better the stocks perform, on average. As the folks over at The Prudent Speculator wrote, “Not quite the Holy Grail, but higher returns with lower risk obviously make for a winning combination.”
And then there’s the matter of the dividends themselves. Dividends aren’t just a token to shareholders: they actually provide a large percentage of stocks’ returns. In this chart (also from The Prudent Speculator, based on 84 years of data from Morningstar) you can see that dividends have provided 41% of the total return for Large-Cap Stocks, 35% for Mid-Cap Stocks and 31% for Low-Cap Stocks.
In short, dividend-paying stocks make great investments!
Investors have been realizing this too. Years of high stock market volatility have inspired many to look for more reliable, less-volatile investment classes. In addition, a growing segment of the population is in or nearing retirement, and looking for ways to generate regular income from their investments. And though this trend has been going on for years, there’s no reason for it to stop now! People are still aging and retiring, and after last year, investing in stocks feels more like a roller-coaster ride than ever.
Which is why, starting today, your Investment of the Week subscription will include something new: a bi-weekly e-mail (alternating with our video series on Fridays) focused on income-generating investments!
To start things off, this week I have a perfect growth-and-income stock for all tastes. If Goldilocks was an investor, this is the kind of stock she’d like.
Waste Management, Inc. (WM) is a national waste management company that collects, transports, recycles and disposes of trash, and develops, runs and owns landfills and waste-to-energy facilities. The company is a slow grower: its earnings per share (EPS) have been more-or-less level for the last several years. However, analysts expect earnings growth both this year and next year, and estimate 10% annual revenue growth for the next five years.
The company’s dividend, on the other hand, has grown steadily every year for the past eight years. WM announced its latest increase in December, a 4.4% increase in the quarterly dividend to 35.5 cents per share. At the current price, the new dividend gives WM a 4.2% yield.
Finally, there’s the likelihood of increasing investor interest in this stock. Reflecting its flat earnings, a multi-year chart of WM so far looks like a flat line. While no one is predicting this stock will take off like a rocket (that only happens to fast-growing companies) it is well-positioned to gradually gain more fans, and their dollars, over time. As I said above, interest in conservative, dividend-paying stocks is growing, and WM is just such a stock. Plus, there’s the Digest double-recommendation indicator: Waste Management was chosen as a Dividend Digest Top Pick for 2012 by not one but two of our contributors.
The first, Jason Cimpl, is editor of Wyatt Investment Research’s TradeMaster Daily Stock Alerts. Jason’s recommendation of WM hinges specifically on how conservative it is. He wrote:
“One man’s trash is another man’s treasure. The infamous proverb holds true for many aspects of life, and is especially true for investments. For traders, the next one-to-three years will be excellent. But for long term investors, it could be excruciating, which is why it’s very important for the latter group to pick the right stock, industry and entry point if they want to profit from their investments during the volatile year ahead. I am a trader, and my holding period is often less than three months. But were I to recommend a position this year, it has to be in an industry group that can survive the test of time. Waste removal is a critical component to any society. Waste Management may not turn lead into gold, but it does turn trash into cash. With a history of converting cash into shareholder value, WM’s dividend has steadily increased at a CAGR [compound annual growth rate] of 7.7% over the past seven years. Next year I estimate they will earn $2.36 EPS from $13.8 billion in revenue. WM is not a growth company, although shares deserve to trade at at least 15 times EPS, or $37. Combined with the 4.5% dividend, that’s 25% upside from here and you should buy shares below $32.50.”
The second recommendation came from Leo Rishty, editor of Unique Situations. He emphasized WM’s middle-of-the-road “Goldilocks” nature:
“Waste Management is what I believe to be the perfect stock for any portfolio—it has a current dividend yield of 4.3% and has increased the dividend for the past [eight] years. What makes WM a very unique situation is that it is a true growth stock. When you consider the constant increase in the population, a growing population means more trash—or, should I say, garbage. WM is the largest company of its type in the world and growing every year. WM is also a truly ‘green’ company. It gets paid to pick up the trash and then turn around and sell some of it for recycling. What they cannot sell or recycle they will burn to make energy. [The company recently] signed joint ventures in China that could lead to explosive growth (which means more profits and higher dividends). In my opinion Waste Management should be in every portfolio, be it growth or income. I rate Waste Management a Strong Buy with a 2012 target of $40.00 per share.”
Waste Management looks like a true best-of-both-worlds stock. I wouldn’t be surprised if it eventually becomes a dividend aristocrat, along with the likes of Pepsi (PEP) and Procter & Gamble (PG). In the meantime, WM promises income investors both regular dividend payments and growth potential.
Wishing you success in your investing and beyond,
Chloe Lutts
Editor of Investment of the Week
