Why to Ignore Hewlett-Packard’s Dividend Hike – and Three Superior Income Plays

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Hewlett-Packard’s (HPQ) announcement last week that it was raising its dividend 10% should get a big cold shoulder from income investors. For starters, Hewlett-Packard only found true dividend religion once it started running into its litany of operational and management disasters a few years ago. This is not a dividend growth story borne from a position of strength.

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HPQ Dividend Chart

The dividend is the price being paid to mollify beleaguered shareholders. (Note: vaunted value investor Seth Klarman sold out his Baupost Group’s sizable Hewlett Packard stake in last year’s fourth quarter.)

And at 2.2%, the current dividend yield isn’t exactly paying you much for betting on a turnaround; that’s not much more than the overall market average.

If you’re looking for an out of favor idea in tech land, Intel (INTC) sure looks more compelling from an income standpoint. Intel’s 4.1% current dividend yield is already a big step up from Hewlett-Packard, and once you factor in the value of share buybacks, Intel’s net payout yield swamps Hewlett-Packard.

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INTC Net Payout Yield TTM Chart

Hewlett-Packard’s 7 PE ratio is indeed cheaper than the 10 hanging on Intel these days; but Intel does not have near the uphill slog (demand is shifting in terms of chips, not disappearing) that Hewlett Packard does, and that 10 PE ratio is still a 40% discount to the market average.

Moving away from tech, Exxon-Mobil (XOM) is another sub-10 PE ratio stock that no one is slapping the “turnaround” label on. Its 2.6% dividend yield is above average. Add in the return from buybacks and the net payout yield is in Intel territory, with plenty of room to keep raising dividends and buying back stock.

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XOM Net Payout Yield TTM Chart

With an 18 PE ratio McDonald’s looks might pricey next to Hewlett Packard, but that multiple is actually in line with its long-term trend line; the global behemoth rarely is as cheap as its burgers.

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MCD PE Ratio TTM Chart

Meanwhile, McDonald’s delivers a 3.1% current dividend yield, and has more than doubled the payout over the past five years, one of the market's true dividend growth machines. Its 5.2% net payout yield is pretty tasty as well.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com.


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