Dividend investors usually focus on companies that have a long track record of increasing their dividends year after year. The companies with at least 25 years of consecutive dividend increases are especially favored by income oriented investors. This is actually not a bad idea as long as these companies continue to increase dividends. However, when one of these stocks was forced to cut its dividend, its share price usually plunges along with its dividend. In these situations, the losses due to share price decline might wipe out the dividend income that has been collected over the years.
Another problem with these stocks is that their dividend yields might be too small. Currently there are around 138 stocks that have been increasing their dividends for the last 25 years. However, only 31 of these stocks have a current yield of at least 3%. One of these 31 stocks that is favored by income investors is Exxon Mobil Corp. (NYSE:XOM) which currently pays $3.48 per share annually, corresponding to a dividend yield of 5%. That may look great on paper, but the problem is Exxon Mobil Corp’s earnings per share over the previous 12 month period was only $3.43. This means XOM sports a PE ratio of more than 20. Analysts expect Exxon Mobil to earn 3.8 in 2020. Assuming that these estimates aren’t too optimistic, this means XOM is trading at a forward P/E of more than 18.
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Also Exxon Mobil’s share price actually declined from $75 in October 2008 to $69 today. Do you feel like XOM is really a conservative investment idea right now?
Another example is Universal Corporation (NYSE:UVV). It has a current yield of 5.6% and pays $3.04 annually. Unfortunately, Universal Corporation earned only $3.54 in the last twelve months, and its total revenue has been stagnant for the last 3 years. We don’t think Universal Corporation is a conservative investment idea. It is more like a melting ice cube.
Let’s take a look at another dividend superstar, National Fuel Gas (NYSE:NFG) which has been increasing its dividends for 49 years. It has a forward dividend yield of 3.9% and a forward P/E of 15. If you had invested in this stock 50 years ago, that would have been great. However, if you had bought National Fuel Gas shares in the summer of 2014, you are looking at capital losses of 41%.
Take Altria Group (NYSE:MO), another tobacco stock. It sports a dividend yield of 6.7% and a forward P/E of nearly 12. Altria Group still has some minimal top line growth, so at this price it doesn’t look like a bad investment. However, if you bought into this stock in the summer of 2017, you are looking at 35% capital losses.
We uncovered a better, more conservative dividend stock than Exxon Mobil Corporation, Universal Corporation, National Fuel Gas, and Altria Group. This stock’s current market cap is only $140 million but it has no debt and $130 million in cash.
The stock is Adams Resources & Energy (NYSE:AE). It is expected to generate $21 million in operating cash flow this year. It owns a fleet of 500 trucks and valuable real estate. We are basically paying $10 million net of cash to buy this profitable company. I believe the market is completely ignoring Adams Resources & Energy’s huge cash pile which is enough to cover its dividend payments for the next 30 years. That’s why I believe the upside is nearly 100%. Adams Energy is the cheapest dividend stock I have seen in the last 10 years.
I like AE because it is extremely cheap and I don’t mind getting paid nearly 3% a year while I wait for the stock price to appreciate 50-100%.
Disclosure: I am long shares of AE and I shared this investment idea with Insider Monkey’s premium subscribers a couple of weeks ago when the stock was trading at less than $32. Right now we have a promotion going on. You can subscribe to our monthly newsletter for only $349/year, a discount of $100. Earlier this week, we shared this idea with our free email subscribers. You can also become a free member here. This article was written on Tuesday and originally published at Insider Monkey.