One of the main reasons why I hate the stock market at these levels is that nobody is really paying a dividend. At secular bear market bottoms, you typically see nice fat dividends of 5% or more. Today you’re hard pressed to find a company that pays more than a point or two.
Since I am involved in technology startups for a living, I try to avoid them from an investment perspective – I’m already levered up enough. Instead, I currently prefer to focus (perhaps ironically so) on the bare essentials – agricultural commodities, and consumer staples that pay fat dividends.
We’ve talked a lot about the former, but not as much about the latter. While I view the US market on whole as fairly expensive (trading north of 15x earnings), some traditional, hardy stocks are starting to look downright cheap – especially when you account for their dividend…and more importantly, the growth rate of that dividend.
Walmart in particular looks to me like a pretty sexy candidate for a DRIP (dividend reinvestment plan). The stock price has gone nowhere for five years – which is a good thing if you’re a dividend investor, because the payout is that much fatter.
Walmart trades sideways for years – why would you want to buy this again? (Source: StockCharts.com)
WMT paid $0.365 for each share last quarter, which puts its annualized yield at 2.83% – which is more than respectable in today’s low/no yield environment. But here’s where it gets really interesting.
From 2009 to 2010, Walmart increased its dividend by “only” 11%. At that rate of increase, the dividend payout doubles every 6 years.
But from 2010 to 2011, WMT really stepped it up with a 21% increase – at that rate, it doubles in just over 3 years…
Which means that your initial investment will be yielding an astounding 19.01% at the end of 10 years!
And the retailing powerhouse also is stepping up its share repurchases in a big way – which is a very good thing if you believe, as I do, that the stock is cheap:
Walmart project share repurchases (Source: Walmart 2011 Annual Report)
You have to love a company that gushes free cash flow, and uses it to crank up dividends, and buy back undervalued shares. If I were looking to invest in Walmart (I haven’t yet, but am thinking about it), I’d probably do so via their DRIP plan – which allows you to automatically reinvest your dividends to pick up more shares. Thus perpetuating the very virtuous cycle that is compound interest in your favor.
Recommended further reading: In a move that is shaking the very foundations of conventional retirement wisdom, the undisputed “King of Retail” is offering a program that, for many retirees, could actually help replace Social Security, 401(k)s, IRAs, pension plans, and the like: “Wal-tirement” is here