2 Grocery Store Dividends to Buy and 1 to Avoid

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Some of the best investments can sometimes be found right under your nose -- or in this case, right around the corner from your house. Great investments are often born out of necessity, and nothing screams of necessary products more than the grocery store.

Grocers often have relatively stable cash flow and many even pay out a quarterly dividend to shareholders. On the flip side, grocery stores also operate on razor-thin margins and have to be very careful when passing along price increases to their customers, as loyalty in this sector comes with a high price tag. After perusing the sector, two grocers stood out from the pack as safe choices to grow their dividends over time, while another grocer which appears safe on paper could have a hole at the bottom of its bag.

Kroger (NYS: KR) -- trust it
Kroger, the parent company behind such chains as Fred Meyer, QFC, Ralphs, and Food 4 Less, is staring rising food costs directly in the eye and coming out victorious.

With arguably the strongest growth among its peers, in its latest quarterly filing Kroger detailed an impressive 4.6% jump in same-store sales. Kroger has been able to reduce energy and product distribution costs, allowing it to actually drop the prices on some of its products -- exactly the opposite of what some of its rivals are experiencing. Because of its ability to maintain and even drop pricing, Kroger's customers are proving more loyal than most other chains' patrons.

With the company focused on installing gas stations at many of its locations, Kroger is making the shopping experience a one-stop outing for families. It's no surprise, then, that Kroger has been able to grow its dividend annually by 10% over the past five years. Currently at 1.8%, Kroger's dividend may not be much to look at, but its growth is unparalleled in the grocery sector.

Ruddick (NYS: RDK) --trust it
Not all supermarkets need to be huge chain stores to make an impact on your portfolio. Larger chain companies Safeway (NYS: SWY) and Winn-Dixie (NAS: WINN) are struggling to maintain margins and grow same-store sales. But Ruddick, a little-known supermarket chain based in the southeastern United States, is rapidly growing its business.

In its most recent quarter, Ruddick announced a 4.4% increase in same-store sales over the year-ago period. This growth led to an 8.1% jump in total sales while management kept a watchful eye on expenses. The company's promotional activity is also spurring increased customer loyalty, which has translated into increased discretionary product purchases.

Ruddick's quarterly payout, much like Kroger's, may not seem worth more than a glance on paper at a 1.3% yield. But take into account that Ruddick hasn't dropped its quarterly payout since 1995 while its dividend has doubled in that time span, and I'm sold on the slow but steady growth of this company.

SUPERVALU (NYS: SVU) --avoid it
Going against the very compelling case fellow Fool Jim Royal made in favor of SUPERVALU last week, I see a drastically different outlook. This is one case where a large short ratio, currently 20% of the float, serves as a stern warning to future shareholders.

SUPERVALU is a work in progress, and for the most part, I prefer to avoid such companies in sectors with razor-thin margins. SUPERVALU's 2012 guidance calls for a 1.5% to 2.5% decline in same-store sales. Also, during its most recent quarter, gross profit dipped from the year-ago period and net cash flows fell to $245 million. Despite a plan to reduce debt, the company still carries $7 billion worth of crippling debt.

Even worse, SUPERVALU was forced to slash its dividend in half when its business turned unprofitable. Though it still yields over 5%, with cash being funneled to pay down debt and a strike looming in Southern California, don't look for that dividend to improve any time soon.

Foolish roundup
Supermarket consumers are fickle. Focusing on same-store sales comparisons and dividend growth to guide your selection process in the grocery sector could put you on the road to healthy profits.

What's your favorite company in the grocery sector? Share your thoughts in the comments section below and consider adding Kroger, Ruddick, and SUPERVALU to your watchlist.

At the time this article was published Fool contributorSean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong. The Motley Fool owns shares of SUPERVALU.Motley Fool newsletter services have recommended buying calls in SUPERVALU. Try any of our Foolish newsletter servicesfree for 30 days.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policythat never requires a coupon.

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