Hungry for Dividends? Let's See What Might Crop Up in the 'Ag' Sector

When we think of food, what we purchase at restaurants or grocery stores or farmer's markets tends to come to mind. But I have an appreciation for going deep down to the root of the matter, and that brings us to agricultural equipment, better known as ag equipment. These are the machines that prepare the soil, plant and harvest the crops, and ultimately collect that which we will eat. Hardly sexy, but rather important in the mission of feeding the world. For dividend-seeking investors, some recent news should whet your appetite for at least one of the companies that serve the ag equipment space. Let's dig in: There really on three large-cap ag equipment stocks that matter to domestic institutional investors -- Deere & Co. , CNH Industrial , and AGCO Corp. . Of the three, AGCO is arguably the purest play on ag equipment, given that construction equipment accounts for roughly 26% of revenue at Deere last year, while at CNH, only 40% of its revenue last year was derived from ag equipment. My preference when looking to invest in a particular segment is to find a well-positioned company that derives the majority of its revenue from the segment. This way, any driving tailwinds should have the greatest impact on its business. Those that have been paying attention to commodity prices, particularly those for corn, wheat, and soybeans, know all three have been soaring of late. What some may not realize is those three crops are some of the key ones for farmers, and higher commodity prices tend to drive farmer income. And when farmers are flush, they tend to spend on equipment. In terms of dividends, those three companies are all dividend payers, but to be candid, their respective dividend yields that run the range of 0.41% to 0.95%, are hardly compelling. What I want to focus on here is AGCO, and its special dividend. The company recently announced a new capital return strategy. That go-forward strategy will comprise three components -- the company's regular quarterly dividend, share repurchases, and an annual variable special dividend to return excess cash. Any future annual variable special dividends made by the company are expected to be declared and paid in the first quarter of each year. Exiting 2020, the company had $8.9 billion in cash and short-term investments on its balance sheet and alongside this announcement shared its plans to repurchase shares opportunistically with a target amount of $120 million to $150 million in 2021 from its existing $245 million authorization. AGCO also announced a 25% increase in its quarterly dividend to $0.20 per share, which brings its forward dividend yield to roughly 0.5% -- still well below our interest threshold. But... In keeping with this new capital return strategy, AGCO announced its first variable special dividend of $4.00 per share, which when included with its new dividend brings the total payout to $4.80 per share and a forward dividend yield of 3.1%. Regular readers of these dividend-facing pieces know I am a big fan of special dividends, particularly those companies that have a stated special dividend policy. It does mean paying attention each year for the announcement and because they are special they can fluctuate from year to year. What I like about the strategy is the extra layer of financial acumen that it brings with it. The downside is that the dollar amount varies from year-to-year, meaning it can be fatter some years and leaner in others. At least for the coming year, we know the special dividend amount and the fundamentals for the company's business are favorable, which likely means robust cash flow is highly likely. That to me suggests the likelihood for at least a similar special dividend in 2022 is likely. Investors looking to capture this special dividend should scoop up AGCO shares before the May 10 record date.

Hungry for Dividends? Let's See What Might Crop Up in the 'Ag' Sector

Here's why good yields can be found in equipment that helps farmers produce ... good yields.

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