As earnings grow (both long-term and through the next up cycle), that pay-out ratio should shrink and the dividend should increase aggressively. Potash Corp./Saskatchewan (USA) (NYSE:POT) sports a strong dividend that’s due to get stronger—eat this one up!
Norfolk Southern Corp. (NYSE:NSC) and CSX Corporation (NYSE:CSX)
Rail companies have seen their stock prices held in neutral, thanks to the downturn in coal. That is just one of the catalysts for growth that come with the strong dividend yields of Norfolk Southern and CSX (2.68% and 2.33%, respectively).
You see, the catalysts for these companies all come from a misunderstanding on how much of an impact coal will have on their earnings. Sure, on paper the coal exposure looks to make up as much as 25% of revenues, but even amidst an awful year for coal, CSX increased earnings 9%. These companies are growing, and there are truly brighter days ahead. Here are some catalysts:
1. Rails operate in an oligopoly, meaning both of these companies only have a few major competitors—which leads to near limitless pricing power
2. Coal is expected to rebound and exports are expected to surge dramatically (thanks India and China!)
3. CSX and Norfolk’s other business lines (like agriculture, intermodal, etc.) are surging
And most importantly, with rising gas prices it’s worth noting that rail is three times more fuel efficient than highway travel. Both of these companies are undervalued, with multiple growth catalysts, and pay-out ratios below 40%. The good times (and dividend increases) should keep chugging right along.
Olin Corporation (NYSE:OLN)
Olin offers a little more in the way of safety and stability than growth. This company is a manufacturer of chlorine, ammunition, bleach products, and more. Olin pays a solid dividend of .80 cents per share (3.21% yield) while sporting a pay-out ratio below 45%. Growth isn’t expected to be overwhelming for Olin, with earnings estimates coming in at about 15% ahead of last year’s figure. But with the stability and diversity of these business lines, and a relatively low pay-out ratio, the dividend should be safe. Things like bleach are purchased in good times and bad, which is the reason Olin stayed largely profitable through the panic of 2008. It should be a stable “total return” winner going forward.
Dividends: a compass for market uncertainty
At the end of the day dividend winners demonstrate many of the characteristics that all good companies do. They have financial fortitude, earnings growth, and favorable prospects. The difference is that dividend payers “prove it.” A company just can’t pay-out a share of its earnings unless it’s really earning cash. That might not mean too much when the market’s floating higher, but it’s a safety net worth having when the winds of volatility swirl. These five stocks provide the growth and safety needed to navigate through the market’s uncertainties.
The article 5 Dividend Winners for This Market originally appeared on Fool.com and is written by Adem Tahiri.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
