Dividend Stocks on Discount – January 2020. Fundamental Analysis – is not Rocket Science ?

The more dividend, the better? So, nothing better than buying dividend stocks with an exceptionally high dividend? Be careful. A high dividend yield can be a pitfall. To assess a stock as an investment requires fundamental analysis, which fortunately is not rocket science. In this article, I will show you how to make an initial assessment with little effort, using the example of Simon Property Group with a juicy dividend yield of 5.7 percent. Equipped with this understanding, you can walk through the list of 15 stocks with exceptionally high dividend yields on your own and hunt for dividend stocks.

Dividend stocks with an exceptionally high dividend

The following list is based on the algorithms of the Dividend Turbo, which continuously compares the current dividend yield with the historical dividend yield for hundreds of the world’s most popular dividend stocks. From this comparison, the Dividend Turbo continuously generates buy and sell signals. Even better: if you are interested in a dividend stock, but the dividend yield is not high enough for you, you can set up a dividend alert with our free membership package. When your targeted dividend yield is reached, you will be automatically informed by e-mail on the same day.

Dividend stocks with a discount listed in the dividend-turbo

Dividend-Stocks with a discount

In this table you can see the top 15 stocks which have a dividend yield significantly higher than the average of the last 12 months. The delta column on the very right shows the percentage by which the current dividend yield is higher than the historical average:

Let´s have a look at the stock of Simon Property Group. As an example, we walk along the most important questions of this stock:

• Is the stock a promising investment?
• Are dividends safe?
• Is the stock over- or undervalued?

The Simon Property Group is a REIT, which comes with some special things to consider when doing fundamental analysis. I first became aware of one of these peculiarities while writing this article. I am always very pleased about these “insights”. However, apart from that you can apply the following to all quality stocks. So, let’s go!

Simon Property Group

Simon Property Group
Logo
Country	USA
Sector	REIT (Retail)
ISIN	US8288061091
Market Cap	42,8 billion USD
Dividend-Yield	5,7%
Stability of Dividends	0,93 of max. 1.0
Stability of Profits	0,97 of max. 1.0

The Simon Property Group is a REIT. The company owns shopping centers and generates its profits from renting and leasing them out. Considering a booming stock market driving technology stocks, and due to the fear of disruption caused by online shopping sponsored by Amazon & Co, stationary retail has been out of fashion for years. Does this create an opportunity for an anti-cyclical entry with an extra high dividend?

Is Simon Property a good investment?

Let us first clarify the most important question of whether the stock is suitable as a long-term investment, which requires long-term profit growth. Only in this case both the company and the stock increase its value in the long run.

Simon Property Group´s long-term profit growth:

Long-term profit-growth of earnings, cash-flow and dividend of Simon Property Group

This looks very promising at first glance. The funds from operations (FFO) rose significantly in the past. Although profits are stagnating at the moment, analysts are expecting profits to rise again in the next fiscal year. During the financial crisis in 2009, however, profits in the retail business declined, which led to two dividend cuts in a row, but these were recouped after another two years.

After the financial crisis, Simon Property Group was able to increase the FFO per share by a double-digit 11 percent per year. The stock price and dividend have accordingly developed strongly during this period. The annual return, made up of stock price gains and dividends, is an impressive 11.4 percent. And this even though the stock price has fallen significantly since mid-2016.

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Since its high at around USD 217, the stock price has lost significantly and is currently a third cheaper at USD 146. We will soon see whether the stock is a bargain today.

Are Simon Property Group´s dividends safe?

But before we do so, we check whether the dividends are safe. An important question, because REITs are primarily bought by dividend investors who enjoy high payouts.

Dividends should always be covered by current profits. This is the case with Simon Property Group. If profits fall, the dividends are cut – as happened during the financial crisis. This is not the case with all companies. Even in bad times, management often tries to keep the dividend at least constant. Because the level of dividends for REITs are based on legal requirements, however, a dividend cut in the event of declining profits is a logical step. In addition, REITs generally do not have the balance sheet strength to pay dividends on pump, because they are legally obliged to payout 90 percent of taxable profits to shareholders instead of using the profits to strengthen the balance sheet.

Simon Property Group Shopping-Center (Source: business.simon.com)

In the case of a REIT, the amount of dividends always depends on the success of the current business. Since Simon Property Group operates shopping centers that are sensitive to economic cycles, an economic slowdown has a direct negative impact on profits and dividends. Despite very good earnings and growth metrics, this should be considered.

What is the fair-value of the stock?

Check out the Dividend Turbo to find out how high the current dividend is compared to the historical dividend. The assumption is that stocks with an above-average dividend yield are valued favorably.

Simon Property Group´s dividend-yield over time

At 5.7 percent, the stock generates a significantly higher return than in recent years. You have to go back as far as the financial crisis in 2009 to find a higher dividend yield compared to today. During the height of the financial crisis, however, the stock was available at a dividend yield of almost 12 percent. Wonderful times? The shareholders at that time probably saw things differently.

I have written that one should not rely on the dividend yield when evaluating a stock. Especially for REITs, however, the dividend yield is more meaningful in terms of valuation than for ordinary stocks, because the dividend and profit, respectively the FFO, march in step due to legal requirements. If the dividend yield rises sharply, the stock price has indeed fallen. But not the profit – at least the numbers are not reported yet. Because the actual profit is usually only announced on a quarterly basis.

Anyway. REIT or not. When it comes to the valuation of quality stocks, i.e. stocks with profits that are as stable as possible over the long term, I think Dynamic Fair Value Calculation is ideal because it is easy to use and yet meaningful.

For our valuation, I have chosen the period from 2006 to the present. During this period, the stock was valued at an average PER (based on FFO) of 15.9 and the average dividend yield was 3.8 percent. Applying these historical figures to today’s FFO and the dividend, we know what the stock should cost if it were valued as in the average past.

Simon Property Group in the Dynamic Fair Value Calculation

If the stock was valued at the historical P/E ratio of 15.9 today, it would actually cost USD 192. But you can get it for 146 USD, which is a “discount” of 24 percent. You get a similar result, if you evaluate the stock using the dividend yield. According to this, the stock would be worth as much as USD 220. And since the analysts expect further increases in ffo and dividends, the fair value of the stock continues to rise in the coming years as well.

My stance on the Simon Property Group

I can’t deny that the stock looks undervalued and promising in the long term (Disclaimer: I don’t have the stock in my portfolio). However, I already smell the criticism of dying retail business due to online competition. But “disruption” is nothing new in the retail sector either. At this point I recommend a look at the 2018 annual report. On page 4, CEO David Simon (note the name) lists disruptions of the last 25 years that the company has already overcome. I see the biggest immediate risk in an economic downturn that would directly affect the retail sector. But that would probably only be temporary, which is why I am optimistic for the stock in the long term.

Conclusion: Fundamental analysis is not rocket science

From time to time, I meet investors who consider fundamental analysis to be a rocket science. Of course, everything can be complicated. But answers to the essential questions can be found without a degree in economics. A little training and the right tool are required. Because even an Excel genius with knowledge in investing will fail if the basic metrics are not correct or not available at all. This becomes obvious with REITs. Where in the Internet can you find, for example, the FFO of the last 20 years including forecasts or easily determine the fair value of a stock with your mouse? DividendStocks.Cash not only takes a lot of work off your shoulders, but also provides you with fundamental insights not available elsewhere.

If you look for stocks with long-term profit growth to benefit from growing dividends and capital gains, register now. Basic membership is free of charge.

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