What's A Good Yield?

3/11/2013


Readers tell us they want stocks with good yields. But collecting a "good" yield isn't as simple as it sounds.

Some investors don't consider stocks paying less than, say, 4% as having good yields. Such approaches are impractical. After all, only 109 stocks in the S&P 1500 Index yield above 4%, one of the lowest counts in more than five years. Given the market's recent strength, the dearth of high-yielders should not surprise us. But even in times of richer yields, 4% is unusually high.

Over the last five years, the S&P 1500 Index has averaged 169 stocks with yields above 4%, a count skewed higher by huge yields during the market meltdown in 2008 and 2009. Since 1994, the index has averaged just 136 companies yielding 4%.

A typical dividend

The average stock in the S&P 1500 Index yields 1.5%, up from the trough of less than 1.3% in 2011. Exclude the 552 stocks that don't pay dividends, and the average yield is 2.4%, slightly above the long-run average of 2.3%. Except for nine months in late 2008 and early 2009, a stretch characterized by unusually low stock prices, the average dividend-payer hasn't yielded more than 3% in at least 19 years.

You may be wondering, "Why don't I just go fishing in the 4% yield pool?" Here's the answer: You don't want to buy weak companies just because of their yields. And if you require some quality in addition to yield, the pickings get quite slim.

Stocks yielding at least 4% average subpar Quadrix Overall scores of 44, with only 11 earning scores of at least 80. And many of the higher scorers are story stocks with operational issues that increase their risk and render them unfit for our buy lists.

Plenty of solid yields

For investors seeking high yields, the selections are limited. But investors who appreciate quality stocks with "good" yields have plenty of options. In every month since October, more than 940 S&P 1500 Index companies paid dividends. Before last year, the last time we saw so many dividend-payers was early 1999. The dividend trend has caught hold marketwide. In January and February, 570 stocks raised, resumed, or initiated dividends, the highest during that two-month period in at least a decade.

As of March 5, 132 S&P 1500 stocks yielded 1% to 3% and earned Overall scores of at least 80, versus the average of 96 since 1994. Most of our recommended stocks that pay dividends fall into that group. And a number of them earn yields higher than the average for S&P 1500 dividend-payers. Check out the table below for a list of above-average yielders that also top their sector average yield and have a history of growing the payout.

Three are reviewed below:

Insurer Aflac ($51; AFL) has raised its dividend in each of the last 30 years. The payout has grown at an annualized rate of 16% over the last 25 years. While the dividend rose less than 10% in each of the last three calendar years, it rose at least 12% in each of the previous 22 years. It would not surprise us if Aflac returned to double-digit dividend growth, now that concerns over its exposure to European bonds have lost much of their bite.

Since Aflac fell short of December-quarter sales targets, the shares have dipped 5%. Japan accounts for about 80% of the company's profits, and the yen is losing ground relative to the U.S. dollar. As of March 6, $1 would buy 93 yen, up from 86 at the start of the year and 78 at the end of October. Aflac projects per-share-profit growth of 4% to 7% for 2013 at constant currency.

But the 2013 profit consensus has fallen 8% over the last two months and now projects a 3% decline, which seems overly conservative. At eight times trailing earnings, Aflac trades at a 13% discount to the median life and health insurer in the S&P 1500 Index and 30% below its own three-year average. Aflac is a Buy and a Long-Term Buy.


Last April, Exxon Mobil ($90; XOM) raised its dividend 21%, the biggest jump in 25 years. Given the oil giant's history of 30 consecutive annual dividend hikes, we expect another boost next month, though perhaps not quite as large as last year's. Exxon yields 2.5%, nearly double the average of 1.3% for S&P 1500 energy stocks.

In 2012, Exxon generated $56.17 billion in operating cash flow. It spent more than $10 billion on dividends, one of only two U.S. companies to top that threshold. The oil giant also spent nearly $21 billion buying back its own shares last year, reducing its share count by 5%. That $31 billion shared with stockholders in 2012 is 38% more than the second-most-generous U.S. company. The consensus projects per-share-profit growth of 7% to $7.97 this year despite an 8% decline in revenue. Analyst revenue estimates vary widely (low of $363 billion and high of $487 billion), most likely reflecting differing opinions about the price of oil and natural gas.

Commodity-price fluctuations can wreak havoc on energy producers' sales and profits from quarter to quarter. However, Exxon's solid, steady dividend provides investors with an element of stability in the face of inherently volatile results. Exxon is a Buy and a Long-Term Buy.


Semiconductor giant Intel ($22; INTC) has become a Wall Street whipping boy, punished for its heavy dependence on the sagging personal-computer market. Because of its lack of success generating growth from the high-flying smartphone and tablet markets, Intel's name is often mentioned when rivals up and down the supply chain run afoul of weak PC demand.

But while some pessimism is justified, Intel's punishment seems disproportionate to its crime. The shares have fallen 12% over the last six months and now trade at less than 10 times trailing earnings, less than half of the median for its industry and 11% below its three-year average. Intel also trades at a discount of at least 20% to its three-year average for price/sales and price/cash flow.

Intel yields 4.2%, roughly triple the average technology stock. Lacking an obvious catalyst, we're not confident Intel will post strong share-price gains over the next year. But the 4.2% yield represents solid compensation for investors willing to exercise patience with this Long-Term Buy.

STOCKS WITH ABOVE-AVERAGE YIELDS
All of the A-rated stocks below yield more than the average S&P 1500 Index dividend-payer and their sector average, also growing their dividends at least 5% over the last one and five years. Stocks on our buy lists are shown in bold.
------- Dividend Growth -------
------- Quadrix Scores -------
Company (Price; Ticker)
Indicated
Dividend
($)
Yield
(%)
Sector
Average
Yield
(%)
Last
Year
(%)
Last
5 Years
(Annual.)
(%)
Last
15 Years
(Annual.)
(%)
P/E
Ratio
Value
Quality
Overall
Sector
Aflac ($51; AFL)
1.40
2.7
2.4
6
10
18
8
99
86
86
Financials
BlackRock
($244; BLK)
6.72
2.7
2.4
12
19
NA
18
50
84
91
Financials
Boeing ($79; BA)
1.94
2.5
1.4
10
6
9
15
81
65
88
Industrials
Chevron
($118; CVX)
3.60
3.1
1.3
11
9
8
10
79
79
82
Energy
Exxon Mobil
($90; XOM)
2.28
2.5
1.3
21
10
7
11
80
74
78
Energy
Intel ($22; INTC)
0.90
4.2
1.4
7
14
28
10
90
88
84
Technology
Microsoft
($28; MSFT)
0.92
3.2
1.4
15
17
NA
11
85
81
68
Technology
Walgreen
($41; WAG)
1.10
2.7
1.9
22
26
16
16
68
65
67
Cons. Staples
Wal-Mart Stores
($74; WMT)
1.88
2.6
1.9
18
16
21
15
71
75
55
Cons. Staples
NA Not enough dividend history. Note: Quadrix scores are percentile ranks, with 100 the best.   

 


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