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The magic of stocks with ever-rising dividends

January 11, 2012

One of the main reasons that 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 percent 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 U.S. 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 is FINALLY starting to get a little bit of respect from investors.

WMT paid $0.365 for each share last quarter, which puts its annualized yield at 2.83 percent—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 percent. At that rate of increase, the dividend payout doubles every six years.

But from 2010 to 2011, WMT really stepped it up with a 21 percent increase - at that rate, it doubles in just over three years...

Which means that your initial investment will be yielding an astounding 19.01 percent 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

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.

Hat tip to power value investor Dan Ferris for the original tip on Walmart's incredible value at these prices.

Disclosure: I don't yet own WMT, but aspire to someday.

Brett Owens is chief executive and co-founder of Chrometa, a Sacramento, Calif.-based provider of time-tracking software that records activity in real time. Previously marketed to the legal community, Chrometa is branching out to accounting prospects. Gains include the ability to discover previously undocumented billable time, saving time on billing reconciliation and improving personal productivity. Brett can be reached at 916-254-0260 and


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