The Dynamic Dividend

Betting on a Housing Recovery? Get Paid While You Wait.

There are certainly opportunities among the beaten-down stocks with strong ties to housing, but it’s impossible to pinpoint when such an investment might actually pay off. Data remains disappointing at best, making it tough to forecast when the real estate market might see an uptick, let alone return to “normal” demand conditions.

If you’re ready to take the plunge and invest in companies with their futures tied to housing, however, there is a way to lessen the sting of “premature accumulation.”

Pick stocks that will pay you to wait for things to improve.

Below is a list of dividend-paying companies that will clearly benefit from a housing recovery — whenever that may occur — and can afford to throw cash at patient shareholders in the meantime.

Despite negative perceptions about their immediate prospects, these companies have the financial solvency to keep paying their dividends for the foreseeable future. They all feature a cash-to-dividend ratio of at least 200% — that is, they have enough money sitting around to maintain their current dividend rate for at least two more years, even if they don’t earn a dime during that period.

Lennar Corporation (LEN)

Lennar used the housing collapse to overhaul its operations in a truly impressive fashion. The builder strengthened its balance sheet by liquidating huge chunks of excess inventory, refinancing its debt to extend maturities, and reducing its overhead by 50%. As a result, the company is now positioned to send the fruits of any housing upticks straight to its bottom line.

The prudent moves listed above have accelerated the company’s comeback: Lennar has turned a profit each of the last five quarters despite obvious industry challenges. Analysts currently expect Lennar to close its fiscal year (which ends in November) with a profit of $0.54 per share, and see earnings ballooning to $1.00 per share in 2012. Not bad for a company that lost more than $12 per share in 2007.

Lennar slashed its quarterly payout by 75% (from $0.16 down to $0.04 per share) in 2008 and has held it flat ever since. With its turnaround ahead of schedule and cash of $5.79 per share on its balance sheet (enough to pay its current dividend for more than 36 years), the company is probably the frontrunner to become the first beaten-down builder to raise its dividend.

Shares of LEN are currently trading at $13.30, where they yield 1.20%.

Lowe’s Companies (LOW)

The home improvement giant currently holds $1.40 per share in cash, enough to cover its dividend for ten quarters. In all likelihood, however, Lowe’s will pad its reserves before it taps into them.

While the company would be an obvious beneficiary of a housing revival, people have continued to remodel, repair, and “do it themselves” enough to keep Lowe’s highly profitable even as the housing market has struggled. And analysts currently expect its EPS to grow by 12% (to $1.61 per share) this year and rise another 15% (to $1.85 per share) in 2012.

Shares of LOW are currently trading at $19.58, where they yield 2.86% — a near-record level. The stock’s yield had never topped 3% until earlier this month, despite a sparkling history of dividend growth.

Lowe’s has raised its dividend every year dating back to 1963, which is the longest streak among publicly-traded retailers. Since 2003 alone, the Class B Dividend Dynamo has increased its payout by more than 1,000%, most recently giving shareholders a 27% raise in May.

Quanex Building Products (NX)

Quanex became even more of a housing play when the manufacturer of aluminum sheet products and window and door components split from its automotive products arm in 2008. All of the company’s financial literature lists “residential remodeling activity” and “housing starts” as its market driver, so a real estate comeback would be huge for Quanex and its shareholders.

In the meantime, shares of NX are trading at $11.09, where they carry a 1.44% dividend yield. The company initiated a quarterly dividend of $0.03 per share shortly after parting ways with its auto business, and gave its payout a 33% bump to $0.04 per share last May.

Quanex currently has about nine years of dividend coverage ($58 million) in the bank, and analysts expect the company to pad that cushion with a profit of $0.56 per share this year and another $0.91 per share in 2012.

The Ryland Group (RYL)

Ryland has housing exposure at every level: it designs, builds, sells, finances, and insures homes. So it’s no surprise the company was forced to slash its quarterly payout by 75% (from $0.12 down to $0.03 per share) at the start of 2009, and it won’t be surprising if the company benefits immensely from a housing recovery.

RYL is currently trading at $10.31, where its yields 1.16%. That’s not a huge payout, but it is a safe one.

Analysts expect Ryland to turn a profit in 2012 after five consecutive years of losses. And if the turnaround hits a snag, it won’t affect the company’s payout… unless we’re talking about a 100 year snag. Ryland has enough cash (a little over $12 per share) to cover its current dividend for more than a century.

The Valspar Corporation (VAL)

If more houses start changing hands, look for Valspar to sell even more of its paints, varnishes, stains, and floor coatings. New builds will need all of the above, and buyers of used homes are rarely impressed with every surface picked by the previous owner.

Shares of VAL currently trade at $29.76, where they yield 2.42%. Investors buying within the next few months will likely be sitting on a higher yield-on-cost by the end of the year, as the company traditionally announces a dividend hike each December.

Valspar has given its shareholders a raise every year since 1982, and there’s no reason to believe it won’t extend its streak to a thirtieth year in a few months. The company carries a sub-25% forward payout ratio, and it’s sitting on enough cash ($1.60 per share) to cover its current payout for nearly nine quarters.

The Scotts Miracle-Gro Company (SMG)

Everyone neglects their yard from time to time, but rarely do homeowners slack on their lawn care right after moving into a new place. If housing turnover starts to pick up, expect Scotts to sell more of its fertilizers, soils, mulches, grass seed, and other consumer products to prideful new homeowners.

Shares of SMG are currently trading at $44.28, where they yield 2.71%. While the company’s dividend growth record only goes back 12 months, it’s already prolific: Scotts doubled its payout last August and gave its shareholders an additional 20% raise earlier this month.

Scotts has nearly $2.50 per share in cash on its balance sheet, enough to cover its payout for more than two years. The company likely won’t need it, however: Despite a weather-induced hiccup this Spring, Scotts still expects to earn about $3.00 per share this year, and analysts see that jumping to $3.41 next year.