In a time when many investors have been fleeing to safe-haven assets and enhanced uncertainty in the health of the global economy continues to prevail, dividend rich companies remain an attractive choice to add a steady source of income.
As compared to last year, dividends and share buybacks in corporate America are making their return after both slumped last year as company’s hoarded cash and were unsure of the health of the world’s financial system. In 2010, 135 companies have raised their dividends and some major players include equipment maker Caterpillar (CAT) and retailers Target (TGT) and American Eagle (AEO).
In general, raising dividends illustrates that a company is in good financial shape and is well positioned for future growth. As for Caterpillar, the company’s earnings have been improving due to upbeat comments about the U.S. economy from Fed Chairman Ben Bernanke as well as favorable Chinese export data indicating global economic recovery and increased demand for Caterpillar’s goods.
The story behind retailers Target and American Eagle are a bit different. Target recently announced a 47% increase in its dividends and American Eagle announced a 10% increase in its quarterly dividend reflecting the strong cash generation of both companies. As for the future, Target plans to stall store expansions and use some of its cash to focus on marketing its higher-margin products. American Eagle’s future is highly dependent on discretionary consumer spending trends, however, its excess cash enables it to have a healthy balance sheet.
Another notable mention in the dividend arena comes from media giant Viacom (VIA-B) as it announced its first-ever quarterly dividend of 0.15 per share. This decision to issue a dividend illustrates the health of the company, which has gained more than 15% year-to-date despite weak revenue generation from its subsidiaries.
Although these companies offer a great source of income through dividends, when investing in them it is equally important to watch declines in value as that these declines can potentially eat away at enhanced returns generated by dividends.
To help protect against this equity depreciation, the use of an exit strategy which identifies specific price points at which downward price pressures are likely to be seen is important.
According to the latest data at www.SmartStops.net, these price points are as follows: CAT at $60.83; TGT at $50.33; AEO at $12.01; VIA-B at $32.76. These price points change on a daily basis and are reflective of market volatility and conditions.
Disclosure: No Positions
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