The Dynamic Dividend

Steven Romick Buys Two More Dividend Stocks

Contrarian investor Steven Romick has been guiding the FPA Crescent Fund since its 1993 inception with the goal of providing “an equity-like return with less risk than the stock market.” Mission accomplished, and then some.

FPA Crescent’s value has grown by more than 150% since it got off the ground, while the S&P 500 has risen just 30% during the same period. That disparity can be attributed to Romick’s knack for risk-aversion: The mutual fund captured 80% of the gains of the S&P 500 in months when it rose and suffered just 55% of the losses when it fell — all while remaining a third less volatile than the index — during its first 17 years.

Romick’s methods have been vindicated on many occasions, but two market-crushing highlights stand out: When the tech bubble burst near the turn of the century (FPA Crescent rose 46% from 2000 to 2002 while the S&P 500 lost 38% of its value), and at the onset of the financial crisis three years ago (FPA Crescent fell by 21% in 2008, but Romick presciently had most of the fund in cash, allowing investors to avoid a big chunk of the 37% drubbing the S&P 500 took that year).

Lately, he’s been piling into blue chip dividend stocks. Heading into the second quarter, Romick’s fund was ripe with names like Pfizer (PFE), Johnson & Johnson (JNJ), CVS Caremark (CVS), Occidental Petroleum (OXY), Walmart (WMT), and Microsoft (MSFT). (He sung the praises of the latter four in an interview with Consuelo Mack just last month.)

In fact, his fund’s top 18 equity holdings all pay dividends. Including the two he just started buying during the second quarter, each of which has the potential for monster dividend growth. Here they are:

Canadian Natural Resources (CNQ)

Romick purchased 2.61 million shares of CNQ during the second quarter, making it the fund’s 11th-largest equity position at the end of June.

Canadian Natural Resources initiated its quarterly dividend in 2001 and has increased its payout every year since. In fact, the company has given its shareholders a double-digit raise in nine of those ten years, most recently boosting its payout by 20% back in March.

While the company has increased its payout admirably during its first decade as a dividend-payer, Canadian Natural’s best dividend growth may actually be ahead of it. Analysts currently expect the company to earn nearly ten times its annual dividend rate in 2012, which means those double-digit dividend hikes should continue for years to come.

Shares of CNQ had an average closing price of $43.14 during the second quarter, which is a 22% premium to Friday’s closing price of $35.46. At its current level, the stock carries a 1.03% dividend yield.

Cisco Systems (CSCO)

Cisco initiated its quarterly dividend in March, and it’s probably no coincidence that FPA Crescent started buying the stock immediately after. Romick acquired 5.45 million shares of CSCO during the second quarter, making it the fund’s 17th-largest equity holding at the midpoint of the year.

The networking giant struck a nice balance between immediate yield, dividend growth potential, and payout stability by starting its quarterly dividend at $0.06 per share. With a forward payout ratio of just 12.6% and an enormous cash hoard ($8.14 per diluted share, enough to cover its payout for nearly 34 years), it would be a shame if Cisco didn’t aggressively raise its dividend in the coming years.

Shares of CSCO had an average closing price of $16.50 during the second quarter, which is an 8% premium to Friday’s closing price of $15.61. At its current level, the stock yields 1.57%.