4 Generous Stocks Set to Beat the Market

Group 1: Investment Strategy - The combination of high free cash flow yield and dividends is a powerful investment strategy that has been proven over 30 years of data across multiple market cycles [2][26][27] - From 1990 to 2016, stocks in the top quintile for both dividend yield and free cash flow yield generated an annual excess return of 6.03% compared to the market [3][16] - High dividend yield stocks without free cash flow produced only a 0.10% excess return, while high free cash flow yield stocks without dividends achieved 3.57% [4][16] Group 2: Importance of Free Cash Flow - Free cash flow is a more reliable indicator than earnings, as it reflects actual cash available for dividends [8][10] - Companies that generate strong free cash flow but do not pay dividends often waste cash on unproductive projects, which can destroy shareholder value [9][10] - High free cash flow dividend payers have shown superior characteristics, including lower leverage and higher returns on equity [10][11] Group 3: Payout Ratios and Dividend Growth - The optimal payout ratio for dividends is around 40 to 50% of free cash flow, allowing for sustainable dividend growth [12][13] - Companies with a 40 to 50% payout ratio can maintain dividends during economic downturns, while those with higher ratios are at risk of cuts [15][21] - The Pacer Cash Cows Index, focusing on high free cash flow yield companies, has delivered annual dividend growth of 9.2% while maintaining a sustainable payout ratio [13][18] Group 4: Performance During Market Cycles - High free cash flow dividend payers recover faster from market downturns, averaging 15 months compared to 28 months for non-payers [11][22] - The S&P study from 1990 to 2017 found that the top quintile combining dividend yield and free cash flow yield outperformed 75% of the time [16] - During bear markets, this strategy provided meaningful downside protection, outperforming 50% of the time [16] Group 5: Company Examples - Archer-Daniels-Midland (ADM) has a dividend yield of 3.4% and a payout ratio of 24%, demonstrating stability and strong free cash flow generation [28][31] - HNI Corp. has a dividend yield of approximately 3.3% with a payout ratio of 43 to 45%, showing resilience despite market uncertainties [33][37] - OneSpan operates in digital security with a dividend yield of 4.03% and a low payout ratio under 8%, indicating strong cash flow and growth potential [39][41] - Luxfer Holdings has a dividend yield of approximately 4.3% and a payout ratio of 43%, focusing on high-performance materials with steady demand [45][48]