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There’s the idea that companies with low dividend payout ratios can grow their companies faster, as they are keeping more of their earnings internally to reinvest in the company. But that might not always be the case.
The average S&P 500 payout ratio is only around 35%. Low payout ratios usually mean the company is reinvesting in the company, and has room to boost its dividend payment.
But the beauty of slightly higher than average payout ratios is that they force management to be disciplined.
Low payout ratios can lead to a false sense of security, leading management to be overly aggressive on investing earnings internally or acquisitions. Thus, higher payout ratios mean less money for management to “waste.”
As a result, many companies with high payout ratios, such as those paying out 50% or more of their earnings in the form of dividends, have actually managed to outperform the market.
Here are the 3 high dividend payouts you should own:
Dividend Payout Ratio #1: Hershey (NYSE: HSY)
Hershey has upped its dividend payment for four straight years, with its current dividend yield right at 2.1%. Its dividend payout ratio is a fairly high 50%. It’s been that way for a number of years. And shares of Hershey have outperformed the S&P 500 by 36 percentage points over the last decade on a total return basis (which includes stock appreciation and dividends).
Hershey is the number one chocolate company in the U.S., owning nearly 45% of the market share. This allows the company to generate solid levels of cash flow year after year, but growth in the U.S. market might be limited. Thus, Hershey is looking overseas. This comes as many emerging economies have a rapidly growing middle class that can now afford discretionary items, such as chocolate.
In 2013, Hershey generated about 20% of its sales from outside the U.S. It expects that number to grow to 50% by 2018. Sales via international markets grew 16% in 2013 and are expected to grow 15% this year.
Dividend Payout Ratio #2: Republic Services (NYSE: RSG)
Republic has upped its dividend payment each year for the last four years, and its current payout ratio is 53%. Its dividend yield is right at 2.8%
Republic is the number two U.S. solid waste company. The beauty of the trash collection model is that trash is generated regardless of the economic backdrop. That makes the stock less volatile than others, including the broader market. Republic Services’ beta is 0.7 (which means that for every $1 the market falls, Republic Services only falls $0.70 on average). Over the last 10 years, shares of Republic Services have beat the S&P 500 by 24 percentage points on a total return basis.
The solid performance year in and year out allows the company to continue to generate solid levels of free cash, which Republic Services has put to work for shareholders via dividends, share buybacks, and strategic investments. These investments include boosting its presence in recycling and converting its vehicles to the more efficient compressed natural gas collection vehicles.
Dividend Payout Ratio #3: Enterprise Products Partners (NYSE: EPD)
The third stock on our list is a master limited partnership (MLP). These investment vehicles have proven to be great capital allocators. Their payout ratios are around 90% of their cash flows, meaning there’s little to no capital left to squander. And when they do find new projects, they have to convince investors it’s worthwhile by raising equity or debt.
Enterprise Products pays out over 90% of its earnings in the form of distributions, and for the last 15 years, it’s increased its dividend payment each year. Its 3.7% dividend yield is the highest of the three high payout stocks listed.
Enterprise Products has crushed the market and the other two stocks listed when it comes to total returns over the last 10 years. It’s returned 522%, which is more than three times Hershey, Republic Services or the S&P 500.
Enterprise Products is one of the biggest midstream providers in the MLP space. It has a diverse portfolio of midstream infrastructure assets that include exposure to natural gas, natural gas liquids, crude oil and refined products. The MLP has proven successful when it comes to making strategic investments. It plans to invest upwards of $8 billion through 2016, which will be a combination of pipelines and NGL fractionators that will bring on a new stream of cash flows.
While many investors screen for stocks with low payout ratios, with the hopes that these stock can boost their dividends faster than other companies can. But that might not be the most prudent strategy for investors looking for stocks that can beat the market over the long-term. The three stocks above with high dividend payout ratios have proven to be solid long-term investments.
Mega-dividends
Ian Wyatt has found 3 stocks that pay dividends so big — you can retire on them. The Wall Street Journal calls them, “mega-dividends.” These stocks have a history of consistently RAISING their dividends… quarter after quarter. In fact, one of these cash-cranking companies hiked its dividend 10-fold! So, if these ever-increasing payouts sound good to you…Click here for all the details.