For investors looking for reliable income, a methodical way to choose dividend-paying stocks is important. A frequent plan involves searching for companies that provide a good yield and also show the financial capacity to maintain and possibly raise those payments. This usually requires looking past the basic dividend yield to examine core earnings, balance sheet condition, and the company's dedication to its shareholder returns. One stock that recently appeared using such a careful search method is Harley-Davidson Inc (NYSE:HOG).
A Search for Lasting Income
The selection method that found Harley-Davidson began with a "Best Dividend" search set to filter for stocks with a high ChartMill Dividend Rating (7 or above). This rating is a combined score that looks at several parts of a company's dividend policy. Importantly, the search also demanded a minimum ChartMill Profitability Rating and Health Rating of 5, making sure that companies passing the filter are fundamentally stable. This tiered method helps sidestep the risk of high-yield stocks that could be hiding core financial trouble, concentrating instead on businesses that produce enough earnings and have the resources to maintain their payments through different economic periods.
Dividend Characteristics: A Mix of Yield and Growth
Harley-Davidson makes a strong case for dividend-focused investors, receiving a good Dividend Rating of 8. The company's attraction is found in a balanced mix of present income and past growth.
- Good Current Yield: The stock provides a yearly dividend yield of 3.85%. This is more than double the present average yield of the S&P 500 (about 1.89%) and much higher than the average for its automobiles industry group (1.04%).
- Dependable and Increasing History: Maybe more critical than the fixed yield is the company's shown dedication to giving cash to shareholders. Harley-Davidson has paid dividends for at least ten years, offering a dependable history. Also, it has raised its dividend at a notable yearly rate of 10.40% over the last five years without a cut, showing management's belief in the business's ability to generate cash.
- Maintainable Payout: The maintainability of a dividend is key. Harley-Davidson's payout ratio—the part of its net income paid as dividends—is at a low 25.50%. This low ratio shows the company keeps most of its earnings to put back into the business, reduce debt, or manage slow periods, all while leaving a wide margin to continue the dividend. The fundamental review also states that earnings are increasing quicker than the dividend, further supporting the payout's maintainability.
Supported by Profitability and Financial Condition
A high-yielding dividend is only as solid as the company behind it. This is where the search's extra filters for profitability and condition show their value, and Harley-Davidson performs well on both counts.
The company has a very good ChartMill Profitability Rating of 9. Important measures back this score:
- Good Returns: Its Return on Equity (10.79%) and Return on Invested Capital (6.16%) are in the high range of its industry, showing efficient use of shareholder money.
- Sound Margins: With a Profit Margin of 7.57% and an Operating Margin of 10.27%, Harley-Davidson does better than over 97% of its industry peers. These margins have shown good increase in recent years, a positive sign for future earnings and, consequently, dividend potential.
Financially, the company is in acceptable shape, shown in a Health Rating of 7. Its liquidity position is sound, with a Current Ratio of 2.10 indicating no issue meeting short-term bills. While the company has a moderate amount of debt (Debt/Equity of 0.68), which matches industry standards, its good profitability and cash flow give a cushion. The review does state that its Return on Invested Capital is presently below its cost of capital, an area for management to improve, but overall stability and liquidity are not pressing worries.
Valuation and Growth Setting
From a valuation view, Harley-Davidson seems fairly priced. Its standard Price-to-Earnings (P/E) ratio of 7.99 is much lower than both the S&P 500 average and its industry peers, suggesting the stock is not expensive. However, investors should note that short-term earnings forecasts are weak, with a predicted drop this year. The company's growth rating is neutral, with past revenue increase being small and future forecasts calling for limited expansion. For a dividend investor, this steady, if not remarkable, growth picture can be acceptable when combined with the good yield and payout maintainability.
A Candidate for More Study
Harley-Davidson Inc shows the kind of company a careful dividend search intends to find: one with a good and increasing yield, backed by solid profitability and a sound enough balance sheet to make the income stream dependable. The company's famous brand, long dividend history, and low payout ratio make it a stock worth study for an income-focused portfolio.
For investors wanting to examine other companies that meet similar standards for maintainable dividend investing, you can see the complete list of results from the "Best Dividend" search here.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer to buy or sell any security. Investors should conduct their own research and consult with a qualified financial advisor before making any investment decisions. Past performance is not indicative of future results.