In Which We Sniff Out Six “Dividend Vault” Companies

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Paul Tracy and the folks at StreetAuthority tend to be very dividend focused — we’ve covered several of their ads that tease long lists of their top picks, many of which are either high-yielding stocks or “blue chip” dividend growth stocks.

And there’s always a soft spot in your friendly neighborhood Gumshoe’s heart for a company that sends you cash just for owning the shares, so I do always like to see if there’s a new dividend idea I should consider. Which leads us to today’s tease about the “Dividend Vault” — just the name sounds so strong and reliable, doesn’t it?

So … what are they talking about?

Well, according to Tracy…

“It’s the easiest way I know to collect thousands of dollars every month for the rest of your life. Invest before Feb. 19, 2013 to get your full share….

“Picture an enormous vault filled with billions of dollars.

“Every day, more and more money is shoveled onto the pile.

“Right now marks an amazing moment in stock market history. You finally have the chance to take advantage of a true once-in-a-lifetime investing opportunity. And all it takes is a few hundred dollars to get started.

“A few savvy investors are already cashing in on the “dividend vault.’”

So phew, we’ve still got a couple weeks to “get our full share.” Just what does that mean?

Well, you probably won’t be shocked to hear this but the pitch is basically just a dressed-up way of saying, “Corporations are loaded with cash like never before.”

And that’s true — companies used the downturn and recession to get leaner and stronger and clean up their balance sheets … at least, the strong companies did that. And they’ve been more reluctant than usual to put that cash to work investing aggressively in expansion, or acquisitions, or, as you’ve probably noticed from your local want ads, hiring new employees. So they’re loaded with cash.

And it’s not just the crazy tech companies that have ridiculous amounts of cash — Apple (AAPL) always leads the list of these cash-strong companies, with more than $100 in net cash per share that they have been very reluctant to do anything useful with (other than the recently launched dividend, of course, which amounts now to a very average ~2.5% yield and won’t slow their cash accumulation very much).

That’s a theme that a lot of reporters and pundits have used over the past year to make predictions — whatever will those corporations do with all that cash? Raise dividends? Increase buybacks? Launch a massive merger & acquisitions wave? There’s no telling how it will play out exactly, but the fact remains that corporate balance sheets are a lot stronger than the average person’s balance sheet, and, though companies have been relatively conservative after being burned by the 2008 crash, many of them are likely to at least try to do something with their cash that benefits shareholders. So those are the stocks that Paul Tracy is looking for … what did he find?

Well, he implies that we’re on the verge of giant payouts:

“The good news is, several companies are beginning to open their ‘dividend vaults’ right now. I’ll give you the names and ticker symbols of several of them in a moment. I’ll also show you how they’re quietly using 3 easy payment methods to unload billions to everyday investors.

“One of these companies just unloaded $2.4 billion on November 14. Another dished out $743 million to shareholders on December 18th. In the month of January alone one company has committed to pay out nearly $906 million.

“These aren’t ‘pie in the sky’ projections. These payments are already on schedule, and checks will be mailed out in the coming weeks.”

Those numbers sound big, delightfully big, but without some context they obviously don’t mean very much — Apple’s quarterly dividend, for example, is right around $2.4 billion and that November 14 payout was probably theirs, but that’s a drop in the bucket (and, though I hate to mention this since I’ve owned and suggested Apple both before and since that date, that $2.65 per share payout didn’t do much to assuage the anguish that shareholders felt as the stock fell by $200 per share over a few months).

Still, we’d like to know which picks Tracy is actually teasing — and no, he won’t “give us” the names and ticker symbols, since he’s trying to sell them, so we’ll have to figure it out from the clues. He pitches the idea of 13 of these stocks, but actually hints at or identifies about half of them … so let’s see what we can share with you.

He gives us three kinds of “Vault Combinations” to start with … the first is a thinly veiled allusion to dividend growth stocks:

“Vault Combination Part One – An 85% Yield from a Stock Yielding 3% ….

“When most investors want a big dividend check, they focus solely on the stock’s current yield. They think bigger equals better.

“To some extent they’re right. Clearly, a higher dividend puts more cash in your pocket.

“But you also need to consider a company’s dividend growth. This can quickly turn a lower-yielding stock into a big income producer.

“Savvy investors know this and use it to their advantage. When Buffett bought shares of Coca-Cola in 1988, it yielded a modest 4%. But since then the company has grown its dividend every year, to the point where it’s giving Buffett a 50% yield on his original investment today.”

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And this “Vault Combination” strategy has indeed been one of the most fantastic wealth-building strategies for investors for decades, particularly for those “buy and hold” investors who picked up shares 30, 40 or more years ago and let the dividends compound … you hear stories of retirees who receive a quarterly dividend payout on, for example, Johnson & Johnson that’s now higher than the price they originally paid for their shares, thanks to the long-term growth in the dividend and the reinvestment of those growing dividends into more shares.

I’ve got a few stories that remind me of the power of this growth — for example, I bought shares of Rayonier (RYN) about nine years ago and still hold them, I stuck with it as an allocation to timber even when I thought it might be getting overvalued or undervalued, I never bought or sold. The initial dividend was about 5%, and that was just lovely, I kept reinvesting it each quarter and now the stock has done very well (along with most of the other timber stocks) over a long period of time and, with lower interest rates, it yields just 3.2%. But that dividend is a 13% yield on my original investment. And still growing and compounding. With stocks like this, I need a really, really good reason to ever consider selling — I know that I’m human, and therefore my chances of selling at just the right time and buying back in at just the right time are poor.

So that’s what you look for with dividend growth — a meaningful dividend and a focus on growing the dividend over time, hopefully with a long and steady record of growth. And, of course, a company whose business you expect to be meaningful for years and years and years, giving you a chance to be patient and let it grow and compound for you as Coca Cola has done for Berkshire Hathaway shareholders. And it helps if you’ve got a strong stomach and won’t be tempted to try to trade in and out of those shares — even Buffett has said from time to time that he should have sold KO when it got to bubble valuations right before the dot.com crash, but people (even Buffett) are generally terrible at picking tops and bottoms consistently … would he have solid it near the peak and known that it was ripe to buy back in when it had dropped close to 50% a couple years later, and hold it through now, when it’s again getting close to those peak prices? Just holding on and letting the dividends pile up means Buffett paid no taxes on the massive gains in KO shares over time, and Berkshire still gets to keep pulling in that KO dividend that amounts now to about $400 million a year on Berkshires 400 million shares. That’s 3% of Berkshire’s annual profits, which is nothing to sneeze at, and in the meantime the value of those KO shares, even without reinvesting dividends (Buffett is one of those investors who doesn’t have to automatically reinvest dividends to compound his returns, of course, his core competency is allocating capital), has grown by about 1,000%.

Which pick is Tracy teasing for this “Vault Combination” strategy?

“‘Dividend Vault’ Stock #1…. It has one of the biggest ‘vaults’ in corporate history — $45 billion (by comparison, Coca-Cola’s “vault” is $9 billion). Rather than let that money just sit there, this company started paying a dividend in March of 2011.

“But here’s the kicker…

“Since then this company has already raised its dividend 133%. That means a $1,000 annual dividend check has turned into $2,330 in less than two years.

“And given that the company still has $45 billion left in its ‘dividend vault,’ it could easily continue to hike its dividend going forward.”

So … according to the Mighty, Mighty Thinkolator this one is … Cisco (CSCO), which you’ve undoubtedly heard of. The giant “guts of the internet” company that still dominates in routers and switches, despite plenty of encroaching competition and some challenges to their margins over the years, is still going strong and piling up the cash. They do have about $16 billion in debt to go with that cash “vault” of about $45 billion, but that and their earnings and cash flow are plenty to keep the dividend growth going if they want to.

Cisco seems perfectly capable of continuing to grow its earnings and revenue by 5-6% a year as they’ve been doing, analysts are predicting that the earnings growth will bump up to maybe 7-8% a year for the next five years, but it’s obviously not going to overwhelm you with its sexy hockey-stick growth. The shares have been bouncing around between the high teens and the low $20s for five years or so now, and the biggest risks are probably that they’ll make stupid, cash-burning acquisitions (like Microsoft buying Skype, for example — CSCO has made wasteful-looking acquisitions in the past, though they’ve mostly been small), or that they’ll have more trouble from lower margins as the hardware that builds the internet continues to be commoditized and pricing pressure hits them. Still, I presume that the hardware and systems they design will continue to grow more complex, and the demands of internet bandwidth and security will continue to grow, so there will still be a need for next generation, high quality equipment, and the biggest and strongest entrenched company should continue to have an advantage in building and selling that next generation of stuff.

So I wouldn’t worry too much about Cisco, even though I personally chose to sell it a few years ago — the dividend yield is quite likely to continue to grow faster than inflation, and people have been predicting the demise of CSCO’s business for a decade now as Chinese competitors snap at their heels, but they’ve still managed to grow revenue and earnings in eight of the last ten years (the two drops were in 2009 and 2011, which is why the last five years have shown a pretty bouncy stock chart and the shares have gotten down to a forward PE ratio of 10). Honestly, I’d still much rather buy Apple than Cisco when AAPL has a lower PE ratio, as it does now, but CISCO is likely to be more stable and cause less hair loss.

What’s the next one?

“Vault Combination Part Two – ‘Tax-Free Dividends’

“… many ‘dividend vault’ companies are using their cash to pay investors increasing dividends. That income stream could be yours to spend how you see fit. You could use it to go on a luxury vacation, pay your monthly bills, reinvest, etc.

“But that’s not the only thing these companies are doing with their cash. They are also giving out what I like to call ‘tax-free dividends.’

“Many top companies issue these ‘dividends.’ They are a favorite of Warren Buffett and many other billionaire investors.

“They work like traditional dividends, but with one major difference — these ‘dividends’ are completely tax-free.

“There’s a good chance you’ve received one of these ‘tax-free dividends’ before and didn’t even realize it. That’s because companies don’t issue these ‘dividends’ in the normal way. They ‘issue’ them by buying back shares of their own stock.”

OK, so this isn’t cash that immediately flows into your pocket, but companies that buy back stock do make each share of remaining stock — like the ones in your brokerage account — more valuable. There are always companies that abuse this strategy, either by foolishly buying back their stock at sky-high prices or by only using buybacks to make up for all the shares that they’re giving away to employees through generous stock option plans (Cisco used to be guilty of this in their heyday, don’t know what their options dilution looks like lately).

And yes, buybacks are more tax efficient — you don’t have to pay taxes on a dividend, it’s just that your ownership share of the company gets a teensy bit larger. Buybacks have increased pretty dramatically for some large companies over time, leading to significant reductions in the number of outstanding shares, so which one is Tracy touting?

“I’m so excited about ‘Dividend Vault’ Stock #2.

“This company has repurchased 467 million shares (more than 22% of all shares outstanding, worth $26 billion) in the past four years.

“No wonder the company has soundly beaten the market year after year. Since they began trading in 2008, the shares have returned roughly 100%.

“Meanwhile they’ve returned nearly 35% in the past year and have handily beaten the S&P 500.

“And this company isn’t even close to slowing down. It continues to dominate a global market… and it recently announced a new three-year plan to repurchase another $18 billion of stock.”

This one, sez the Thinkolator, is Philip Morris International (PM). I don’t personally own or write much about tobacco stocks, but this has indeed been one of the spectacular winners both since it was spun off from Altria, and in the decades before that — thanks to steady dividend increases over time, the original Philip Morris was, according to Jeremy Siegel’s research, the best performing stock for the second half of the 20th century. Philip Morris was also, like Cisco, included in StreetAuthority’s list of the “top ten stocks for 2013″ that I wrote about (and revealed tickers for) back in December.

So what are our other “Dividend Vault” stocks? We’ll run through quickly, shouting out the answers for you as we go:

“‘Dividend Vault’ Stock #3: … in 2007, a 46-year-old CEO in New York got a call from Steve Jobs. Jobs asked the impossible: Can your company create a brand-new product, mass-produce it in enormous quantities… and can you do it in 6 months?

“The CEO didn’t blink. Yes, absolutely.

“Five years later, the product his company created is now used in more than 1 billion devices worldwide and counting.

“This product is ultra-thin and highly sensitive (important for touch-screen applications), yet it’s extremely strong and almost impervious to normal wear and tear.

“Just about every major manufacturer finds that rare combination of attributes highly attractive. If you own a phone, laptop or tablet, then you’ve likely come in contact with this specialty product. You’ll find it on 33 brands spanning 900 models worldwide.

“Thanks to the popularity of this product, ‘Dividend Vault’ Stock #3 has quietly amassed a $6 billion ‘dividend vault.’ This is especially large considering the entire company is valued at around $18 billion.”

That one’s Corning (GLW), now famous for their “Gorilla Glass” and long-known for their fiber-optic cable innovations, but still overwhelmingly dependent on demand for large screen televisions.

Next!

“‘Dividend Vault’ Stock #6 is a special ‘toll’ company with a $6 billion ‘vault.’

“Although the company was founded in 1966, investors couldn’t buy a stake until about five years ago.

“Since it’s gone public, the stock is up 857% thanks to its seemingly unstoppable growth. Maybe that’s what attracted the world’s greatest investor — Warren Buffett — and his investment team. His giant investment firm, Berkshire Hathaway (NYSE: BRK-B), bought a 216,000 share stake in this company in 2011. And then Berkshire “doubled down” — buying 189,000 more shares a few months later.

“Now this company is making a big splash in China… and buying back billions in stock.”

That one’s Mastercard (MA), a stock I gnash my teeth over not owning. They just announced a buyback authorization and a dividend increase, though both are still relatively small compared to MA’s $60+ billion market cap.

Another!

“‘Dividend Vault’ Stock #9 is one of the most successful companies in recent history. Just $10,000 invested in this company in 2009 would be worth $61,600 today.

“After several years of record earnings and rapid growth, this stock is now holding $29 billion in cash. And if you count the money it holds in long-term investments as “cash” as many analysts do, then the company’s ‘dividend vault’ equals a mind-boggling $121 billion.

“For years, management swore it would never pay a dividend. But as its pile of money grew — and as it keeps growing every day — the company had practically no choice but to start giving money back to shareholders.

“And that’s exactly what it’s doing. Last August it started paying a dividend for the first time in 17 years. And the company recently committed to spend a minimum of $45 billion in dividends and share buybacks over the next three years.”

Well, whattya know — this one’s Apple (AAPL). Still amazing that this would now hit any kind of “dividend” list, but there you go — tons of cash, cheap, and obviously a lot cheaper than it was three months ago.

Keep ‘em coming!

“‘Dividend Vault’ Stock #13 gives investors the best of both worlds. Not only does it yield double-digits… it has a soaring share price, too.

“In the past 12 months this stock has delivered an incredible 42% return. That’s nearly 3 times better than the S&P. A big reason for this success is the company’s unique and highly-profitable business model….

“‘Dividend Vault’ Stock #13 gives everyday investors a rare chance to participate in fast-growing private companies alongside big shots like Jeff Bezos, Bill Gates and others. And all it takes is a few hundred dollars.

“And in a unique twist, this company is legally required to pay 90% of profits to shareholders in the form of dividends. As a result, the stock pays a sky-high 10% yield….

“This company has also posted impressive dividend growth. Since paying its first dividend in May 2011, it’s already increased its quarterly payment 125%.”

This one, says the Thinkolator, is Medley Capital (MCC), one of the relatively new crop of Business Development Companies making the scene in recent years — they did pay their first dividend in May, 2011 after going public in January that year, the dividend has increased by 125% since that first quarterly payout, and the yield is close to 10% (a bit under at the moment, annual dividend is indicated at $1.44 and the shares are just over $15). I’ve never heard of this one before, to be honest.

The relatively high yield implies that folks think they’re a bit riskier than the average BDC, perhaps because they’re smaller and newer than most, or maybe because of their relationship with their external management company, I don’t know … but they seem to pursue the same general BDC strategy of making relatively high-interest-rate loans to a fairly concentrated group of small and medium-sized businesses.


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16 Responses to In Which We Sniff Out Six “Dividend Vault” Companies


  1. Good job again, Travis.
    Regarding AAPL, I had some contrary indicators as it was hitting $700 but didn’t deem myself foolish enough to short it or even buy puts – 20/20 hindsight…

    I am now, though, encountering a number of people buying Apple in this $450 range and it even got a mention on SeekingAlpha today from Bret Jensen mentioning that MarketWatch profiled it as being on Giant Squid’s top ten list. Bret is a guy whose picks have been making us money of late, so I read whatever he writes.

    Regarding PM, many think it’s expensive.. time will tell.

    thanks,
    Roger
    InvestLetters.com

    Like(0)

    • I bought and sold Apple three times at 85/119/154 and dumped it all in CQP at 8.44. When Apple hit 620 I was at B/E. After that I made a mistake…but now in the 400′s Im way ahead.
      I used to try to figure out what stocks these orga were promoting as a challenge and to not pay their fees. I was right maybe 50% of the time. THINKOLATOR has totally impressed me and you can’t beat it. Thanks.

      Like(0)

  2. It is not a bad strategy to go for dividend paying stocks as you may have more stability if you pick a good company.

    Like(0)

  3. Great thinkolater work! I’d never looked at the long term effects of div yields on your original investment. Interesting thought. In my wife’s ROTH, I’ve bought mostly “safe dividend” payers. In my own accounts, I’ve opted for sexy growth. I refuse to compare out 2 accounts for fear the sexy may not actually be so sexy.

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  4. Great article on dividend stocks, that is really all I buy if I am going to just buy a stock, it must pay a dividend..

    Like(0)

  5. loving think o later and thank you for the follow thrujust because some one touts a stock doesn’t make it so

    Like(0)

  6. I recently found Stock Gumshoe while Googling the name – Genia Turanova – after receiving a teaser promo for the “Leeb Income Performance” newsletter. It sounds similar to the “Street Authority” promo that was analyzed here. It would help me if you decoded the Leeb promo picks and gave your opinion of them. Great column; its better that reading a mystery novel – less time to do, and a financial incentive as a bonus!

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  7. Travis, YOU are the sanity and shining LIGHT in a universe of Black holes!!! They all suck you in , spinning yarns of nebulus profits and spectacular shooting stars! The ole’ Thinkolater is the Best “Planet” I’ve found!! Thanks a MILLION!!

    Like(0)

  8. I would like to add INTC (aka Intel). Now paying a nice dividend. Paying 87 cents per share in dividends. Has increasing eps. increasing dividends per share. Now about 21 per share. I value the company the way I learned in the 1980s at 24-25 per share. So INTC is undervalued. INTC is considered a chip maker only by most but it just spent 10,148 million in R&D is considering clouding computing where it would have a competive advantage as a chip maker as well as the mobile market. If the R7D is fruitful than price appreciation will be in order. I do not own stock in INTC.

    Like(0)

  9. I have a question maybe someone could help with since we are on the dividend topic. I hold VDAIX which reinvests the dividends quarterly. The question is how close is this to a DRIP as far as performance goes. The diversification appeals to me.

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    • It is exactly the same…..from the FreeDictionary.com:
      Dividend Reinvestment Plan
      A practice or agreement in which dividends on a security are used to buy more of the same security rather than be disbursed to the investor in cash. A dividend reinvestment plan is relatively common in mutual funds; investors agree to use dividends and other capital gains to reinvest in more shares of the mutual fund. While this involves assuming more risk in the mutual fund, it carries the possibility of higher returns.
      Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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  10. I would like to add AMT (American Tower); while its payout rate is only 1-2% it is organized as a REIT. Once it stops putting up cell phone towers the dividend growth rate probably will increase considerable. Now about 77-78 dollars a share but I undervalue the company at 35 dollars a share. [Undervalue because I learned valuation in the 80's.] When I went to its web site I noticed that it seems to saturate its target area, which gives it a local monopoly. Its market capitalization is about twice that of its competitors. It seems to be valued by the market as a REIT. I think I will see a large capital gain and will enjoy rising dividends in the meantime. Nothing about its financials bother me nor about I have learned about management. I do own shares in AMT. A lot of them.

    Like(0)

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