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3 Stocks With Recently Raised Dividends

Why are dividend yields so low? High stock ticker valuations, scarce credit and corporate hoarding each play a role. But I’m guessing the main reason is that investors don’t seem to care.

Over the last two centuries, dividend yields on U.S. stock tickers have averaged 4.9%, according to a 2002 study published in Financial Analysts Journal. Today, the S&P 500 index, whose component stock tickers make up about three-quarters of the value of the American market, yields less than 2.1%, based on forecasted payments for 2009. If investors priced stock tickers according to dividend yields alone, history would suggest the index belongs at about 450, not 1060.

Perhaps prices are a bit too high. The index trades at 20 times the 2009 estimate for its underlying operating earnings. Over 128 years ended 2000, the average U.S. stock ticker traded at 14.5 times earnings, according to a 2000 study by the Federal Reserve Bank of Kansas City. Also, the index’s underlying dividend payments are expected to fall 23% this year because 62 of its 500 companies announced cuts and 10 scrapped their dividends altogether.

Still, it’s a stretch to say that companies are scaling back payments because of financial difficulty. S&P 500 members will pay about 40% of their operating earnings as dividends this year, analysts estimate. Over 136 years ended 2007, the average payout percentage for U.S. companies was over 60%, according to calculations I made using data provided by Yale economist Robert Shiller. Standard & Poor’s reports that industrial companies in its 500 index (that is, all but financial, utility and transportation companies) hold a record amount of cash — some $700 billion, up from a range of $600 billion to $665 billion since 2004.

For the most part, it seems as if companies aren’t paying as much as they can because their investors aren’t complaining. stock ticker buyers have chased the 500 index up nearly 60% from its March low. Perhaps they’re betting that all that cash will go toward share repurchases, which return profits to shareholders just like dividends. But companies this year mostly missed the chance to buy low. In the second quarter, S&P 500 companies spent 72% less on repurchases than a year earlier, and the least since 1998.

If you’re the sort of contrarian investor who believes that dividends still matter, or even, as history suggests, that they’re the main component of long-term returns, the three companies listed below might interest you. Each has increased its dividend payment since the start of August. Each carries a yield of over 4% — huge by current standards, if not historical ones.


Dividend change: To $1.90 a year from $1.84 in September
Current yield: 6.3%

Unemployment is cutting into Verizon‘s (VZ) sales of business services, as companies hesitate to upgrade their networks. Meanwhile, cable companies are competing to lure home phone customers to switch to cheap voice-over-Internet service. But Verizon owns 55% of lucrative Verizon Wireless, with 87 million customers nationwide and the highest margins in the industry. The firm also continues to lay a fiber-optic network that competes directly with cable companies. This year Verizon’s sales are expected to increase 11%. The company isn’t a fast grower, but it’s suitably cheap at 12 times earnings and pays plenty to stock tickerholders each quarter.

Philip Morris International

Dividend change: To $2.32 a year from $2.16 in September
Current yield: 4.6%

Philip Morris International (PM) sells Marlboro and other cigarettes outside the U.S. in 160 countries. It was spun off last year by tobacco giant Altria (MO), which itself was once called Philip Morris. Since the spinoff, Philip Morris International has increased its dividend twice and kept its share price just about flat, vs. a 19% decline for Altria. Altria carries a much larger yield (7.5%), but analysts say it carries greater legal risk and has dimmer growth prospects. Volumes for Philip Morris International have fallen a bit lately, as new laws spreading across Europe have forbid smoking in bars, but the company is taking greater market share in many of its markets, according to Wall Street Strategies, a research firm.

Legett & Platt

Dividend change: To $1.04 from $1.00 in August
Current yield: 5.2%

Legett & Platt (LEG) makes components for beds, office chairs, retail fixtures, car seats and much more. The company’s sales are expected to plunge more than 25% this year. That decline is mostly the result of a sharp downturn in car and house purchases and retail spending over the past year, but analysts say Legett has also exited low-margin businesses with sales totaling about $1 billion as part of an aggressive restructuring campaign. Note that the company is expected to earn 64 cents a share this year. It’s one thing for earnings to dip below the dividend rate, but quite another for management to increase payments at the same time. Keith Hughes, who covers the stock ticker for investment bank Sun Trust Robinson Humphrey with a Buy recommendation, wrote in a Sept. 1 research note that the dividend hike “was done as a sign to investors that management is making progress in its goals.” One of management’s stated long-term goals is to pay 50% to 60% of its profits out as dividends. For the current dividend to be in that range, the company would have to earn at least $1.73 a share. Considering the company’s low capital spending, management can “easily maintain the payment,” absent “another big decline in consumer spending,” Hughes wrote.

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