I haven’t written much about the Palm Beach Letter, but Tom Dyson and Michael Masterson/Mark Ford have been given free reign to pitch their newsletter to most of the Agora and Stansberry mailing lists, it appears, so we sure see a lot of their ads. And lots of folks have been asking about this one, an ad that’s titled “Dividend Diluvia” and teases a few stocks but that also hints at a “Fed Savings Account” Secret that will get you safe returns that are 3X as high as your bank is offering.
So we ought to look into it, eh?
The “Dividend Diluvia” bit is really just a focus on dividend growth, though Dyson is looking at smaller companies than most dividend investors — most of the time, when you hear about a conservative dividend growth portfolio it will be built around megacap names that are on many of those “dividend achievers or “dividend aristocrats” lists of stocks that have consistently raised their dividend annually for decades, picks like Intel or Procter and Gamble or Johnson & Johnson (I own Intel shares, just FYI).
Dyson appears to be looking down-market a bit, in the potentially undiscovered “future aristocrats” lists — smaller companies that have become rapid dividend growers but that don’t necessarily have decades of boosting dividends behind them just yet … with the implication that because they’re small, they have the potential to grow much more rapidly than the PGs and JNJs of the world.
Or as Dyson puts it …
“Popular blue chips like McDonald’s, ExxonMobil, or Wal-Mart are no longer the best dividend paying stocks around.
“That’s because another group of stocks has been paying out much more than those blue chips ever could.
“Just ask ‘insiders’ like Jane Sampson, who collected $60,454…Jack Hopper, who received $124,650…Rick Hudson, who made $26,280…or Ron Michaels, who grabbed $129,600.
“You see, each of these people have discovered a rare type of stock that raises its dividends by an average of +38% a year…through bull and bear markets alike.”
The stocks he gives as examples of this kind of “dividend diluvia” are midsize names that have dramatically increased their dividends over the past decade — Watsco, Brown & Brown, FactSet and Strayer, all of which pay out 10-20X what they paid as dividends in 2000. So that’s impressive, though we note that of course any of us can pick great stocks to buy in 2000 now that we’re 12 years past that date, and there are doubtless plenty of dividend-paying stocks that were small caps 12 years ago and are still very small or out of business. But still, it’s nice to have something to shoot for.
How does Dyson describe these picks?
“For one, these stocks are incredibly rare. Though they’re all in brand-name industries…at this time, there are ONLY about twenty of them listed on all the U.S. markets.
“I call these stocks The Dividend Diluvia… ‘diluvia’ because they give investors a ‘flood’ of dividends.
“I came upon them during my ten years of research looking for the best income investments I could find.
“I believe they present the safest and most consistent way you could grow your income in today’s uncertain markets.”
So … the criteria?
“Large, Consistent Dividend Raises ….
“Perfectly sized … less than $2 billion ….
“Much less debt …. They’ll likely never have to stop paying their huge dividends to service a debt.”
And because these companies are smaller and not key parts of the major indices, Dyson says they aren’t driven by the overall market the same way that blue chips are, institutions don’t dominate the trading in these picks and they have little analyst coverage, so they get ignored and trade on their fundamentals. The example he gives of this “go up in a bear market” tendency is Royal Gold, which obviously is an odd duck — it fits in many ways, growing dividend and growing company, but its outperformance clearly owes more to gold’s bull market than to anything else.
So what are the “Dividend Diluvia” picks? Well, I’m afraid Dyson doesn’t give much in the way of clues for us to dig through and feed into the Thinkolator — he throws these points out there for a couple of them:
“Since 2002, it has raised its dividends an average of 24% each year…and shows no sign of stopping.Are you getting our free Daily Update
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“That means, if you had received a $1,000 dividend in 2002…by today, your dividend would have grown to $4,200.
“But this isn’t even the best one I’ve found…
“Another Diluvia is an international, New York based manufacturer. I’ll bet at least one person in your family uses its products every day of the week.
“This Dividend Diluvia has raised its dividends by 1,100% since 2002…
“… has been very resilient in the last bear market crash, and kept increasing its dividend the whole time…nearly DOUBLING it (+97%) in 2010, and then growing it another +23% in 2011.”
And the accompanying charts tell us that the dividends for these two went up dramatically — from under 50 cents to over $2 for the first, and from about 50 cents to over $4 for the other.
So who are they? Well, that’s not enough to be confident about a solution … the Thinkolator wasn’t certain enough for me to want to name two names and get you revved up … but we can give you an idea of the kinds of companies Dyson is pitching. Here’s a screen that I ran over at Morningstar to get at some of these kinds of companies:
Those are the criteria at the bottom — market cap of under $2.5 billion but over $350 million, just to make sure it’s small but not tiny; dividend yield of less than 7% and payout ratio of less than 75% to make sure that the yield is real and sustainable; low debt at less than 25% of the capital structure; a dividend of at least 1% to make sure the dividend isn’t trivial; and annualized dividend growth of at least 15% (I chose that over a minimum per-year dividend growth number, since many firms kept divs steady during the financial crisis but didn’t grow them, and many small companies have erratic hikes — a big raise followed by a smaller one, etc.).
And there are some interesting names in that result list — I tinkered around with it a bit to see if I could add some other criteria to narrow it down further, so if you also demand that the company has grown revenue, on average, over the past three years you can cut it down to 11 names, or if you demand dividend growth in the most recently completed year of at least 20% to show some momentum on that front, you get to ten names. That shorter list of big recent dividend hikes, with tickers, is here:
American Equity Investment Life — AEL (life insurance)
Cal-Maine Foods, Inc. — CALM (eggs)
Chemed Corporation — CHE (Roto-Rooter and Hospice Centers)
G & K Services, Inc. — GKSR (uniform rental)
Inter Parfums, Inc. — IPAR (perfume manufacturing and distribution)
Knight Transportation, Inc. — KNX (trucking)
MTS Systems Corporation — MTSC (testing and measurement)
Stage Stores, Inc — SSI (Stage, Bealls, Peebles, and Palais Royal rural dept. stores)
Steris Corporation — STE (Med. equipment, particularly to stop infectious disease spreading in health care facilities)
Tower Group, Inc. — TWGP (property & casualty insurance)
I haven’t run down each name on the longer or shorter list, but those are the kinds of companies he’s likely pitching. I like the Morningstar screener, but just about any financial information portal website (Yahoo Finance, MSN Money, etc.) will have a decent stock screening tool that lets you winnow down the markets to create short lists of stocks to investigate.
You could probably do worse than this shortlist, though as with any portfolio of dividend growers you’d want to check out the fundamentals and make sure they have a sustainable business, good management, and some capacity to grow in the future — and of course, seeing Cal-Maine in that group reminds me that you don’t want all your eggs in one basket.
Pause for riotous laughter.