9 Dividend Rebuilders to Buy Now

published 3 November 2012

The financial collapse of 2008 and 2009 reshaped the roster of dividend champs. Hundreds of banks, industrial companies and real estate investment trusts that had been reliable dividend payers slashed or eliminated their cash distributions during the downturn. But now, more than three years after the recession ended, the economy is slowly recovering, corporate profits are healthy, and some of the worst offenders are assiduously moving to repair the damage.

These dividend rebuilders offered many fine income-and-growth opportunities, even as the stock market approached record highs in early October. Investing in companies that are restoring their payouts is a sound long-term strategy. If you buy shares that pay a small dividend, the yield on your original investment can soar if the company boosts the rate. And because rebuilders formerly paid high dividends, you can be confident the bosses are willing to share the wealth once the exchequer permits them to.

There’s no simple way to screen for these kinds of stocks. One way to generate ideas is to filter for firms that have a record of negative dividend growth over the past five years but increased payouts strongly in 2011 and 2012. From that starting point, you need to inspect balance sheets and cash-flow statements, and glean clues from earnings calls and press releases, to be confident that a company has the money—and the will—to maintain dividend momentum. Low interest rates help because many companies are refinancing their debt. That lowers their costs and allows them to build up their cash piles—which can be used for paying dividends, among other things.

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Because dividend rebuilders are by definition turnarounds, their current yields can be underwhelming. Consider S.L. Green (symbol SLG), a REIT that owns office and retail properties in and around New York City. Green’s current annual dividend rate is $1 per share. With the stock at $79, the yield is a puny 1.3% (all prices are as of October 4). But Green paid an annual rate of $3.15 in 2008, and on their second-quarter conference call with analysts and investors, officials promised to continue raising dividends substantially. In fact, the process has already begun: The dividend rate was 40 cents a share last year. And the prognosis for commercial real estate values and rents in New York City is favorable.

Bank stocks, like REITs, offered superior yields before the Great Recession. Some will never do so again, even if they managed to survive the crisis. But as more banks, especially leading regional institutions, put time and space between themselves and both the housing crash and the government’s loan-bailout program, they are accumulating the wherewithal to fix their fallen dividends. Worth considering, among others, are BB&T (BBT), which, at $34, yields 2.4%; Fifth Third (FITB), which yields 2.5% at a price of $16; and PNC (PNC), which trades at $65 and yields 2.5%. As long as the economy avoids falling back into recession, these stocks should perform well and should deliver a steadily rising stream of dividends.

Turning to industrial stocks, a top candidate is Dow Chemical (DOW). Its quarterly dividend rate had been 42 cents per share before it was trimmed to 15 cents in 2009. As the company reduced its debt and boosted profits and cash flow, it raised the rate to 25 cents in 2011 and to 32 cents in 2012. At $29, the stock yields 4.4%. Other well-known industrial firms that are mending tattered dividends include General Electric (GE), trading at $23 and yielding 3.0%, and Ingersoll-Rand (IR), which at $46 pays 1.4%. Among less-familiar names, two that have begun restoring their payouts are amusement-park operator Cedar Fair (FUN), yielding 4.7% at a price of $34, and furniture maker Steelcase (SCS), which at $10 yields 3.5%. Note that Cedar Fair is a master limited partnership, so purchasing it could complicate your tax returns.

Topics

Income Investing

Kosnett is the editor of Kiplinger's Investing for Income and writes the "Cash in Hand" column for Kiplinger's Personal Finance. He is an income-investing expert who covers bonds, real estate investment trusts, oil and gas income deals, dividend stocks and anything else that pays interest and dividends. He joined Kiplinger in 1981 after six years in newspapers, including the Baltimore Sun. He is a 1976 journalism graduate from the Medill School at Northwestern University and completed an executive program at the Carnegie-Mellon University business school in 1978.