Kicking off Dividend Week

 | Apr 28, 2014 | 3:30 PM EDT  | Comments
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We watch a lot of "Shark Tank" around our house. My son and I love it and my wife tolerates it better than baseball and zombies, so we probably watch the show a few times a week.

When I look at the panel of very rich folks on the show, I find it very interesting that two of the wealthiest, Mark Cuban and Kevin O'Leary, have both been very outspoken on the subject of buying stocks. Both think that buying stocks that do not pay dividends does not make a lot of sense. Cuban has written that buying a non-dividend-paying stock is a lot like owning baseball cards, while O'Leary said on CNBC not long ago that if a stock doesn't "pay daddy," he has no interest.

I am a big fan of dividends as well and think that most individual investors pay too little attention to this all-important component of long-term returns. Rather than worry about what Netflix (NFLX) or Tesla (TSLA) is going to earn this quarter they should be focusing their attention on cash returned to the actual owners of the company in cash. With that in mind I think I will make this week dividend week and focus on some solid income-producing total-return strategies worth consideration.

One of my favorite strategies, especially for pre-retirement investors in their 40s and 50s, is the dividend growth approach to the market. This is a long-term strategy and focuses on companies that have a good track record of raising their dividends and can be expected to raise them in the future. I simply use the Value Line universe and screen for those conditions using the Value Line data and projections. I have found them to be fairly reliable over the years. Given my strong value bent, I also cut the list to just those stocks trading at less than 2x book value and 15x earnings.

As with any other search for reasonable priced stocks, the results were not exactly robust, but there are a few stocks worth considering. Noble (NE) operates as an offshore drilling contractor for the oil and gas industry. It has 77 vessels right now and new rigs placed into service are driving solid results right now. It easily surpassed the always-highly-accurate analysts' estimates in its most recent report and is well positioned for continued growth. The stock is pretty cheap, with the shares trading at 9x earnings and 1.1x book value. Dividend growth for past five years has been impressive, with increases averaging more than 20% annually. The Value Line projections actually show that pace picking up, so the dividend growth potential here is outstanding. The stock pays a pretty respectable current yield right now as well. The shares are paying 4.76% at the current price.

Sticking in the energy patch Ensco (ESV) is also cheap enough to consider by long-term dividend-seeking investors. It also provides contract drilling services and currently has a fleet of 74 vessels. The company has strong exposure to the more-lucrative deep-water drilling segment of the market and was one of the first companies in those drilling markets. The company should see relatively robust growth in sales and profits and the stock appears to be undervalued relative to its long-term prospects. The stock trades at just 8.5x earnings at 1.1x book value right now. It has grown the divided at a very high rate over the past decade and Value Line expects it to continue increasing payouts by more than 25% annually.

Janus Capital (JNS) has struggled for several years now and has seen 19-straight quarters of investor outflows. The company has been taking measures to increase its exposure to other markets and asset classes and that seems to be working as outflow slowed in the latest quarter. In spite of difficult operating conditions, management has been shareholder friendly as they have increased dividends by an average of more than 30% over the past five years. They also seem to like the prospects for the business as three insiders have been buyers of the stock in 2014. The stock is currently trading at just 14x earnings and 1.2x book value. I might wait for a little bit of a pullback in this stock before jumping in, but the dividend growth potential is attractive from a long-term perspective.

Dividend growth investing is a long-term approach to making money in the stock market that has worked very well. You have to be patient and ignore the short-term noise and fluctuations, but it can help you build wealth over the next decade.

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