Stop Overlooking These 2 Dividend Stocks!
By Daniel Miller | December 01, 2017 |

We've all done it -- plugged a yield figure into a screener in search of the next great dividend stock, and had it spit out hundreds or thousands of options. While such lists may be a great place to start, searching with that kind of black-or-white criteria can cause you to miss the diamonds in the rough. For example, here are two companies well worth serious consideration -- one that probably wouldn't make it through a simple screen, and the other that might get dropped from your short list for all the wrong reasons: Ferrari N.V. (NYSE: RACE) and The J.M. Smucker Company (NYSE: SJM).

Racing ahead
While owning an actual Ferrari vehicle can never be more than a pipe dream for the vast majority of people on planet Earth, it's much easier to own shares of the luxury automaker.

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There are plenty of reasons to invest in Ferrari, well-known for crafting some of the most expensive, exotic sports cars out there. One is the company's ability to turn its unchallenged pricing power into ridiculous margins that trounce automotive industry norms.

The savvy investors who have already jumped on the bandwagon have sent Ferrari stock soaring 104% over the past 12 months. In part due to that, a yield screener likely won't turn up Ferrari because its current dividend yield is a modest 0.60% -- but that's not going to be the case forever. Management says it expects its annual dividend payout ratio to range between 25% and 40%, and it's currently sitting near the bottom of that range. Given the automaker's incredibly valuable brand, and its consistent ability to generate earnings and cash flow, expect its payout ratio to quickly accelerate toward the high end. 

Ferrari is also protected from the impact of peaking U.S. auto sales, thanks to the exclusivity and expensiveness of its cars. It practically decides how many vehicles it's going to sell annually. The company offers investors upside as the population of high-net-worth individuals grows globally -- a factor that means the automaker can increase production somewhat without hurting its exclusivity, and which would in turn boost its already strong profits.

Ultimately, while Ferrari won't show up on many dividend screens today, income-focused investors should pay attention to the automaker, as it probably will be increasing its payout ratio and its dividend for many years to come.

Adapting, not dying
When 93% of all U.S. households have a J.M. Smucker product in their kitchens, you know your brands have remarkable presence. The company also has a stranglehold on the segments that contribute the majority of its top line: J.M. Smucker is the No. 1 or No. 2 brand in the categories that generated 75% of its fiscal 2017 net sales. 

A stock screener might not filter out J.M. Smucker, given that its dividend yield sits at a healthy 2.8%, but many investors might cut it from consideration for different reasons. It's in a niche that requires constant innovation and focus to spot and react to consumer trends.  And despite its valuable brands -- which include Smucker's, Jif, Pillsbury, Crisco, Hungry Jack, Folgers, Kibbles 'n Bits, among many others -- the company faces fierce center-of-store competition. Those risks might lead some investors to look past J.M. Smucker, but that could be a mistake. 

Management believes it can stoke growth by offering new platforms within existing brands, such as new Jif snack products for consumers on the go -- think Jif peanut butter & chocolate snack bars. J.M. Smucker will also focus on increasing e-commerce sales, especially for its pet foods unit, where online revenues grew 85% during the first quarter. Lastly, the company is aiming to generate $140 million in incremental cost savings during fiscal 2018.

Ultimately, if J.M. Smucker can leverage the long list of popular brands that make it a favorable partner for retailers, increase its e-commerce sales, and cut costs, it could produce sweet results beyond its current 2.8% dividend yield. Investors would be wise not to overlook it.

This article originally appeared on The Motley Fool.

 

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