Imminent Dividend Raise At This Auto Parts Distributor
Imagine being in the market to buy a used car.
You scan the car dealership lot and there are two choices that catch your eye…
One is a sleek coupe with fancy rims and a loud exhaust. It looks and sounds fast.
The other is an unassuming sedan. It has conservative trim and an engine that squeals.
The salesman looks on in amazement as you tell him that you’d like to purchase the plain four-door.
As you drive off the lot, you smile to yourself. You’ve just purchased Car and Driver’s Best Sports Sedan of 2007, and it happens to do zero to 60 mph in 4.8 seconds.
All that this particular one needs is a new fan belt.
The point is, don’t judge a book by its cover.
Unfortunately, some income investors make this very mistake…
The Pursuit of Yield
Many investors are enamored with high yields, thus causing them to make decisions that, on the surface, appear sound.
Since dividend investors are usually interested in income, it’s only natural to focus on stocks with the highest current yield.
Perfectly logical approach, but perfectly flawed, too!
Don’t chase yield.
Time and time again, we’ve shown that companies with a history of increasing dividends will tend to have higher total returns than higher-yielding stocks that never increase their dividend.
Better yet, dividend growers come with less risk.
These companies are the preferred investment for income seekers.
With that in mind, here’s a stock with a pending dividend increase announcement.
Imminent Dividend Hike
Genuine Parts Company (GPC) is a market-leading automotive and industrial replacement parts distributor. GPC distributes over 380,000 automotive products through its 58 NAPA distribution centers located across the United States.
This distribution network is GPC’s competitive advantage – it’s three times the size of O’Reilly Automotive’s (ORLY), which is GPC’s closest competitor.
GPC currently trades with a forward P/E of 20.0, compared with ORLY’s P/E of 21.5. GPC also has a much lower debt burden than ORLY.
Analysts expect GPC to grow earnings at a nearly 8.5% rate over the next five years, so its free cash flow generation should continue, supporting more dividend growth.
And since that’s where our real interest lies, let’s look at GPC’s dividend…
GPC is a Dividend Aristocrat with a 57-year history of increasing its dividend and an impressive 79% payout increase since 2004.
GPC’s trailing four-quarter dividend payout ratio is still relatively low at 47%, which ensures ample room for increased distribution of cash to shareholders.
Since March 9, 2009, the start of the bull market’s amazing stretch, the S&P 500 Index has achieved a total return (dividends reinvested) of 199%. GPC has produced a total return of 290% during the same period.
Although GPC’s dividend yield of 2.6% is higher than average, it certainly isn’t massive.
Instead, the source of its outperformance is execution. The company continues to deliver on its strategy, enabling it to consistently raise its dividend – the heart and soul of dividend investing!
GPC’s tentative dividend declaration date is set for February 18, 2014, and a dividend hike is virtually guaranteed. The only question is by how much.
At Dividends & Income Daily, we’ve developed a research service that seeks out exactly this type of dividend growth company… so that you can profit from them!
It’s called The Dividends Accelerator, and you can check it out here.
Richard Robinson, Ph.D.