One of the many benefits of buying stocks after a financial crisis is that, because of the sheer lack of money in the financial system, even traditionally stable dividend-paying companies must slash or eliminate their dividend payouts to keep their corporate balance sheets viable. Where's the benefit? The company will raise the dividend again, eventually. One such company that was forced to cut its dividend owing to the financial unpleasantness a few years back was the airline leasing company Aircastle (AYR). After paying a $0.70 dividend late December 2008, Aircastle cut its dividend to $0.10 in 2009 and has kept it there ever since---ever since Monday, that is, when the company raised its dividend by 25% to $0.125, bringing the annual dividend yield up to around 4%. Four percent is a nice yield on a company whose stock price may increase substantially as well over the next few years, especially when the dividend is raised even further.
What I find interesting is that even when AYR traded at what will probably be a generational low of around $2.80 during March of 2008, Aircastle did not eliminate its dividend. After all, what companies would ever need to lease planes again, since the world was plunging into the second Great Depression? The market was essentially pricing in bankruptcy for the company, but Aircastle didn't believe the financial media. If you had bought the stock then, not only would you have quadrupled your money (as AYR currently trades around $12.00), but you also would have locked in an annual dividend yield of roughly 14% with that ten-cent quarterly dividend on the shares you purchased during the lows. If you still owned your Spring-2008-bottom shares today, your annual yield on those shares would be nearly 18% after Monday's quarterly dividend increase to 12.5 cents per share.
Now what if we apply this strategy to other stocks? Are there stocks that will soon (within the next year or two, let's say) raise their dividends? The idea would be to buy the stock now so that the low purchase price of the stock will make our annual dividend yield higher. A stock that I own in my (nearly) permanent portfolio is General Electric (GE). Different from the appliance behemoth you may remember from the nineteen-seventies, GE is a conglomerate whose business now centers around energy infrastructure, finance, and entertainment. Before GE cut its dividend to $0.10 in 2009, the company paid a respectable $0.31. During the past year or so the company has raised its dividend three times, signaling to investors that as soon as cash on the balance sheet becomes available, GE will reward its shareholders with an increase in the quarterly dividend. The dividend stands currently at $0.15 per share, but my sense is that by the end of the year it will be significantly higher.
GE's CEO Jeff Immelt has hinted that GE Capital, the finance arm of the conglomerate, may start paying a dividend again to its parent company as early as the end of 2011, but certainly by 2012. That dividend will be added to the current 15-cent quarterly dividend. Shares of GE currently trade around the unimpressive level of $18.50. If you buy the shares around that price and the quarterly dividend rises even to $0.20, on those shares you will have an annual dividend yield of 4.3% ($0.80/$18.50). If the dividend eventually goes back to $0.31 and you bought the stock at these levels, your yield on those shares will be 6.7% ($1.24/$18.50). At that dividend yield, the stock price will also have appreciated in value to at least $35 because the increase in dividend will result from increased profits, which will move the stock price.
Finally, most money managers who hold GE currently have held it for a long time and have watched the stock plummet and the dividend all but disappear. They have held the stock because in the past GE had been a stable income-producer with its steady dividend. If that dividend doesn't rise enough to be a viable income source for investors, the pressure will be on Jeff Immelt to step down, and his replacement, having witnessed the demise of his predecessor, will increase the dividend post-haste.
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