Dividend investors usually focus on companies that have a long track record of increasing their dividends year after year. The companies with at least 25 years of consecutive dividend increases are especially favored by income oriented investors. This is actually not a bad idea as long as these companies continue to increase dividends. However, when one of these stocks was forced to cut its dividend, its share price usually plunges along with its dividend. In these situations, the losses due to share price decline might wipe out the dividend income that has been collected over the years.
Another problem with these stocks is that their dividend yields might be too small. Currently there are around 138 stocks that have been increasing their dividends for the last 25 years. However, only 53 of these stocks have a current yield of at least 2.5%. One of these 53 stocks that is favored by income investors is Archer-Daniels-Midland Company (NYSE:ADM) which currently pays $1.40 per share annually, corresponding to a dividend yield of 3.1%. That may look great on paper, but the problem is Archer-Daniels-Midland Company’s earnings per share over the previous 12 month period was only $2.10. This means ADM sports a PE ratio of more than 21. ADM is a large company with a very liquid stock but it isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). It isn’t even among the top 100.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
ADM shares have been trading as high as $53 in May 2015, so ADM investors’s capital losses pretty much equal to whatever in dividend payments they received from ADM since then. Five years of no net gains. This isn’t conservative investing in our book.
Another example is Arrow Financial Corporation (NASDAQ:AROW). It has a current yield of 2.85% and pays $1.04 annually. Unfortunately, Arrow Financial’s current PE ratio of 15 is much higher than other high dividend financial stocks like Wells Fargo & Company (NYSE:WFC) which is 25% cheaper on a PE basis and offers a much higher dividend yield of 3.84%. Financial stocks are the reason why we are in this mess. In order to bulk overleveraged banks Central Banks worldwide have been artificially keeping interest rates down, essentially robbing savers for the benefit of financial stocks. Many conservative investors won’t feel comfortable investing in financial stocks for the rest of their lives.
Let’s take a look at another dividend king, Artesian Resources Corporation (NASDAQ:ARTNA) which has been increasing its dividends for 27 years. It has a forward dividend yield of 2.7% and a trailing P/E of 23. If you had invested in this stock 27 years ago, that would have been great. However, if you had bought Artesian Resources Corporation shares two years ago, you are looking at capital losses of 14%.
Finally, let’s take a look at another dividend stock that actually looks good on paper: Franklin Resources, Inc. (NYSE:BEN). The stock has a current yield of nearly 4.2% and trades at a very reasonable trailing PE ratio of 11. It seems like a cheap stock with a decent dividend yield. Unfortunately there is a reason for that. Franklin Resources is a melting ice cube. Its revenues shrank from $6.6 billion in 2016 to $5.8 billion today and its net income also shrank by 30% during the last 3 years.
We don’t think these are conservative investments suited for conservative income investors. Recently we uncovered a better, much more conservative dividend stock than Archer-Daniels-Midland Company, Wells Fargo & Company (NYSE:WFC), Artesian Resources Corporation, and Franklin Resources. This stock’s current market cap is only $160 million but it has no debt and $130 million in cash.
The stock is Adams Resources & Energy (NYSE:AE). It is expected to generate $21 million in operating cash flow this year. It owns a fleet of 500 trucks and valuable real estate. We are basically paying $30 million net of cash to buy this profitable company. We profiled this stock in our monthly newsletter 2 weeks ago when it was trading for $31 and change. At the time it was trading for only $5 million premium to its net cash position.
I believe the market was completely ignoring Adams Resources & Energy’s huge cash pile until we started bringing this stock to investors’ attention. Its huge cash pile is enough to cover its dividend payments for the next 30 years. We love investing in companies that trade for much less than the value of its assets. Adams Resources’ net cash is worth $30 per share, so we are currently paying an additional $8 to receive $0.96 per year in dividend payments. We provided a detailed write-up of this stock in the last issue of our monthly newsletter.
Disclosure: I am long shares of AE and I shared this investment idea with Insider Monkey’s premium subscribers a couple of weeks ago when the stock was trading at less than $32. Right now we have a promotion going on. You can subscribe to our monthly newsletter for only $349/year, a discount of $100. Earlier this week, we shared this idea with our free email subscribers. You can also become a free member here. This article is originally published at Insider Monkey.
