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Where Dividends Are Defended: Two Dividend Champs

October 24, 2018

I love stocks that pay you. Dividends are the lifeblood of a successful portfolio. And this doesn’t just apply to retirees, as dividends should be a part of an overall growth strategy for every investor.

Just look at the long-term return of the S&P 500 Index. For the past 20 years, the index has generated a price gain of 153.06%. That’s nice, but when you include dividend flows into a portfolio invested in the index, the return swells to 269.66% for an average annual equivalent return of 6.75% (even taking into account market jolts like the one earlier this month as well as more serious market downturns like 2008).

That means that dividends contributed 43.24% of the overall total return for the general stock market, as tracked by the S&P.

Dividends are great, because they pay you to be patient during flat and down markets. And if you don’t take them for living expenses, you simply stack them up in your portfolio—either letting them compound in a money market fund or (even better) strategically investing in more stocks so your portfolio will have a greater chance of seeing ample growth over the years. As one of my favorite investment sayings goes, I’ve never met a man gone broke with regular checks coming in.

There are two companies that I want to draw to your attention to that continue to be champions of dividend payouts over the past several years. Both are set up as investment companies, which avoid Federal income taxes and therefore help investors avoid the dreaded double taxation on dividends most companies are subject to (taxes being taken out on the corporate level and directly from investors).

The first of these companies is a long-time favorite of mine, Compass Diversified Holdings (CODI). This is a holding company that buys and owns a collection of high-quality branded products for consumers and professionals as well as industrial customers.

In the consumer businesses, it has baby carriers and related products (through companies like ERGObaby) that are renowned for their safety and quality and are regularly called out by reviewers and customers. It also has outdoor sporting gear including crossbows for hunting (from its newest subsidiary, Velocity Outdoor), tactical clothing and related gear for the sportsman, the military and first responders. It also owns a top gun safe manufacturer in Liberty Safe.

With the wave of cannabis investments, Compass is ahead of the curve with non-drug-related food products in the hemp space that are being gobbled up in thousands of stores.

On the industrial side, Compass owns companies with niche products that have few or competitors. They include food warming products for food outlets (the ubiquitous Sterno), custom foam for shipping, custom on-demand specialized circuit boards as well as industrial magnets and even one of the best names in environmental clean-up services.

All together, these companies deliver ample cash, which has risen in revenue by 29.80% over the trailing year. And this funds a dividend yielding 8.78%, which Compass manages throughout the year for steady distributions. And the return for shareholders isn’t just the dividend, as the overall return for the past ten years is running at 249.31% for an average annual equivalent of 13.32%.

Then we have another holding company set up as a business development company. Hercules Capital (HTGC) is in what I call the merchant banking market. It doesn’t buy and own companies like Compass does, but rather finances companies in various stages of their development, taking equity participation and guiding them along their way until it is time to sell them or to list them in IPOs.

Hercules focuses on the technology sector. It is based in the American tech Mecca of Palo Alto, California. As I like to say, they drive around peeking and poking around garages in the posh neighborhoods looking for guys and gals in their hoodies working on the next greatest products.

It has many of what are now considered bold-faced names in the tech market out of its current and past collection of hundreds of companies.

Along the way, it generated ample cash from its financing and gains over time as it helped their companies with their exit payoff strategies.

Revenues continue to advance, with the trailing gain running at 9.00%. It has an enviable net interest margin of 9.20%, which traditional banks would drool over. And its efficiency ratio, or the measure of how much it costs to earn each dollar of revenue, is sitting at a nice 45.30%, very low compared to traditional corporate lenders.

Return on assets is multiples of traditional lenders, at 6.50%, while the return on equity is also impressive at 12.30%.

The dividend is running at 9.88% and has a five-year average payout rise of 3.58%, well above the underlying inflation rate.

Like Compass, it delivers both a big dividend and gains over time. The total return of the stock over the past ten years is 354.72%, for an average annual equivalent of 16.34%.

That makes for a great case of a defended dividend payer providing long-term growth for any investor’s portfolio.