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business newsWhy Dividends Are Back
By
Josh Lipton Mar 25, 2010 8:45 am
More companies are paying back their shareholders with cash. Starbucks is the latest.
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On Wednesday, the Seattle-based coffee powerhouse announced that its board had authorized the company’s first-ever cash dividend.
Starbucks will pay its initial quarterly dividend of $0.10 per share on April 23, which analysts note represents a dividend yield of about 1.6% at the current stock price.
The company said that it’s targeting a dividend payout ratio of 35%-40% of net income, though that’s subject to the board’s green light.
Starbucks also authorized the repurchase of 15 million shares of the company's common stock, which is in addition to 6.3 million shares that remain available for repurchase under previous authorizations. (See also Beware the Return of the Buyback)
Morningstar analyst R.J. Hottovy, who covers the company, said his model projects that Starbucks will generate about $1 billion in annual free cash flow the next few years, or around 9% of revenue.
“As such, we are confident that Starbucks will be able to fund its growth initiatives, even with these shareholder-enhancing activities,” the analyst wrote on Wednesday. “Since we do not expect the firm to return to lofty double-digit revenue growth in the foreseeable future, we believe this is the appropriate time to put a dividend program in place.”
As we noted recently in the article Five Funds for Dividend Hunters, investors are seeking shelter by diving into the indexes for dividend stocks. This makes sense: Dividends can make a big difference over the long haul.
Put it this way: Let’s say an investor put $10,000 to work in two portfolios starting in 1979 -- one with dividend payers in the S&P 500 and another with non-payers -- and then walked away. The dividend-paying portfolio would now be worth $348,879 while the non-paying portfolio would be worth $232,368.
According to Standard & Poor’s, companies have announced dividend increases of $4.7 billion so far this year. Eight companies have initiated a dividend just since January 1.
This is the largest increase since the $6.7 billion that was registered in the fourth quarter of 2007, says S&P, and it’s in sharp contrast to the first quarter of last year when companies slashed dividends by $38.7 billion.
Why the reversal?
“February is usually a very good time for dividends,” says Howard Silverblatt, Standard & Poor’s senior index analyst. “But we also see more companies in different sectors telling us that they have enough confidence in their own financials to do a dividend.”
The analyst adds, “They’re also sitting on tons of cash -- a record high of $831 billion at year’s end.”
Silverblatt forecasts a 5.6% jump in dividend payments in total this year.
There are various ways for investors to line their portfolios with dividends. There are dividend-focused mutual funds, for one. Morningstar mavens specifically like T. Rowe Price Equity Income (PRFDX).
There is also a dividend-focused ETF to think about: specifically, the Vanguard Dividend Appreciation (VIG), which includes holdings such as Chevron (CVX), McDonald’s (MCD), and Procter & Gamble (PG).
For more on a select list of dividend-paying stocks, check out our article on the subject, Ten Dividend Stocks to Pad Your Portfolio.
No positions in stocks mentioned.
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