Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Here is last week's selection.
This week, we're going to take a break from large-cap companies as I show you why American Eagle Outfitters (NYS: AEO) is really a great income play you should consider.
Teen retailers are really a mixed bag, with many right now suffering from higher input costs, changing consumer trends, and huge markdowns to move unwanted merchandise. On the flip side, these same retailers are benefitting from consumers who are tired of putting off discretionary purchases and from a much warmer winter that had people out shopping compared with last year, when winter storms had them holed up in the homes.
This is a battle we're seeing played out in American Eagle's shares as well as those of its closest rivals, Abercrombie & Fitch (NYS: ANF) and Gap (NYS: GPS) . For Abercrombie, higher costs put a dent in the company's earnings last year, sending it screaming downward. Gap, which has been a regular addition to the list of retail disappointments, has seen its stock shoot up to a new 52-week high on an 8% rise in March same-store sales, despite heavy levels of discounting that are still dragging down its overall earnings.
The reason American Eagle appears compelling, even as it's just pennies from a new 52-week high, is that it fits perfectly into the mid-tier niche between discount teen retailers like Aeropostale (NYS: ARO) , which have struggled with excessive markdowns, and higher-price-point stores like Abercrombie, which are still struggling to get consumers to trade up to its higher-priced and higher-margin products.
American Eagle did struggle with changing consumer habits as well, and its margins are currently under pressure as it rids itself of excess inventory, but from a larger perspective, very few companies have done as good a job at putting the right mix of product in front of consumers as American Eagle. Much lin the same way True Religion Apparel (NAS: TRLG) has been cashing in on people's love for denim (and their want for it at essentially any cost), American Eagle's strongest products are denim-based.
American Eagle is also set up to weather cyclical downturns with relative ease, because of the company's cash-heavy balance sheet, which boasts $745 million in cash and no debt. By choosing to use its cash flow to fund what should be a strong international expansion campaign over the next decade and pay out its dividend, shareholders have one less thing to worry about.
Now let's take a look at that amazing dividend, which is currently yielding 2.5%. American Eagle's quarterly payout has jumped by 450% since it first began paying a stipend in September 2004, and -- in what I find more impressive -- the company chose not to reduce its dividend during the darkest days of the recession. Have a look at American Eagle's payouts by the year.
American Eagle's dividend has pretty much done nothing but go higher over the years (excluding a $0.50 special dividend paid out in 2010). Even better, that dividend could easily head higher over the long term, as indicated by its payout ratio of just 56%.
Let this again serve as a reminder that small- and mid-cap companies can pack just as much of a dividend punch as large caps, so keep your eyes open at all times!
American Eagle will go through product shifts and cycle hiccups just like every other retail company, but it has proved time and time again that it's able to adapt quicker than its peers. It's sitting pretty in a mid-level price niche (not too pricey, not too cheap), which should help it maximize margins while its plan for international expansion should drive profits for years to come. American Eagle is a dividend champion in the making.
If you're craving even more dividend ideas, I invite you to download a copy of our latest special report, "Secure Your Future With 9 Rock-Solid Dividend Stocks," which is loaded with income-producing companies hand-selected by our top analysts. Best of all, this report is free, so don't miss out!
Add American Eagle Outfitters to My Watchlist.
At the time thisarticle was published Fool contributorSean Williamshas no material interest in any of the companies mentioned in this article. He usually avoids the mall at all costs. You can follow him on Motley Fool CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool owns shares of Aeropostale. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policythat wears short shorts.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.