You're getting a nice, double-digit raise. Not in your paycheck, but your portfolio. Standard & Poor's (MHP) expects companies in its S&P 500-stock index to pay out almost 14% more in cash this year. More are raising dividends and others are starting them. The likes of Costco Wholesale (COST) and Xilinx (XLNX) have boosted the ranks of dividend payers in the S&P 500 this year to 376.
Who's next? That's what I wanted to know as I surveyed a list of the remaining 124. Some, such as AT&T Wireless, which is being bought by Cingular Wireless, are out. Another 27 had no free cash flow (cash from operations, minus capital spending) over the past four quarters, according to the Reuters (RTRSY) Fundamentals data base. Among the rest are a slew of technology companies, such as EMC (EMC), that hope for fast growth and so plow the cash they create back into operations. Veritas Software (VRTSE), which in the past year generated $536 million in free cash flow, plans to keep it all, both as an operating cushion and as a reserve for acquisitions and stock buybacks. A Veritas spokesman told me that "a dividend isn't the best possible use of cash."
JUST THE SAME, I FOUND even some well-known tech names are softening the Silicon Valley dogma against dividends. Cisco Systems (CSCO), for one, generated the most free cash flow among the nondividend-paying S&P 500 (table). In 2002, shareholders voted down a proposal for a payout, and a Cisco spokeswoman said the board right now doesn't deem a dividend a good idea. But she added that in March, CEO John Chambers told a Wall Street crowd that he does not have a "religious" view on the question, opening the door a bit. In the past year, Cisco generated free cash flow of 86 cents a share. Were it annually to pay out, say, 13 cents, its stock would yield 0.6%, about what Intel (INTC) and Microsoft (MSFT) already pay. Lexmark International (LXK), the big maker of computer printers and supplies, is another tech stock that may get a dividend. Last year's change in the tax law, which sharply cut the rate on dividends, is only one reason. Since finishing a plant expansion in 2001, Lexmark has accumulated $1.4 billion in cash. In the past 12 months alone, it generated $563 million in free cash flow.
Just because a company created free cash doesn't mean a dividend is coming. Qwest Communications International (Q), whose cash flow was swelled by an asset sale, can't pay one until it clears restrictions imposed by lenders. Ditto Nextel Communications (NXTL). Time Warner (TWX) ended its dividend in 2000 amid a calamitous merger with America Online. It's back on a better financial footing, but CEO Richard Parsons recently made clear to Wall Street that he is eyeing ways to invest the cash flow. A dividend, he said, is "premature." Elsewhere, the time is looking ripe. Two health insurers that are merging, Anthem (ATH) and Wellpoint Health Networks (WLP), each generate lots of cash and a dividend is a live possibility. Another prospect is Kroger (KR). Two years back, new credit terms freed the supermarket operator to restore a dividend it had ended in 1988. A third of its cash flow now is devoted to cutting debt, the rest to stock buybacks -- or a dividend.
Dividend stocks can lag bull markets. But they're a hedge at other times. Through May 24 this year, S&P 500 dividend payers returned 1.5%, while nonpayers lost 2.8%. Think of dividends as unemployment insurance for your portfolio.
By Robert Barker