Simply High-Yield

3/9/2015


Today we're keeping income simple.

Regular readers know we're not fans of most singleminded high-yield strategies, in part because they tend to lock investors into a few sectors or industries, which makes portfolios riskier than they appear at first glance. Instead, we like to focus on fundamentally strong stocks. If they pay a nice yield, all the better.

MORE STOCKS PAYING OUT
The percentage of S&P 1500 Index stocks paying dividends today (69%) tops levels three (61%) and ten (59%) years ago. Most sectors follow the same trend, with only consumer discretionary lagging both historical periods.
------- % Paying Dividends -------
Sector
Today
(%)
3 Years
Ago
(%)
10 Years
Ago
(%)
Consumer Staples
80
53
62
Cons. Discretionary
63
78
80
Energy
62
54
54
Financials
91
87
92
Health Care
35
33
31
Industrials
81
74
65
Materials
85
83
82
Technology
43
30
22
Telecom Services
71
59
60
Utilities
100
97
89
S&P 1500
69
61
59

These days, dividends are easier to find than three or 10 years ago, with 69% of S&P 1500 Index stocks paying dividends, versus 61% at the same time in 2012 and 59% in 2005. On average, dividend-payers yield 2.2%, below the average of 2.5% in the depressed market five years ago but roughly in line with the average since 1994. Eight of 10 sectors have more companies paying dividends than 10 years ago, and eight also average higher yields.

In the table below, income-hungry investors will find some yields they can sink their teeth into. We looked at all of the stocks rated A (above average) on our Monitored List and selected the 20 top yielders from that group. An A rating implies greater investment appeal than the typical stock, but not all A-rated stocks make it onto our buy lists.

20 HIGH-YIELDERS
Below are the 20 highest-yielding stocks ranked A (above average) on our Monitored List. Financials and consumer discretionary combine to make up 55% of the group, which includes only companies that pay dividends quarterly. Stocks on our buy lists are in bold.
--- Div. Growth ---
Company (Price; Ticker)
Div.
($)
Yield
(%)
Payout
Ratio
(%)
1
Year
(%)
5
Years
(Annual.)
(%)
Quadrix
Overall
Score
Sector
Dow Chemical
($50; DOW)
1.68
3.4
54
31
10
70
Materials
General Motors
($38; GM)
1.20
3.2
43
0
NM
79
Discretion.
Cisco Systems
($29; CSCO)
0.84
2.9
39
11
NM
89
Technology
Intel ($34; INTC)
0.96
2.8
41
7
10
83
Technology
Manulife Financial
($17; MFC) e
0.49
2.8
32
7
(6)
86
Financials
MetLife ($51; MET)
1.40
2.7
24
27
12
88
Financials
Valero Energy
($59; VLO)
1.60
2.7
24
60
12
96
Energy
Target ($78; TGT)
2.08
2.7
59
21
24
83
Discretion.
J.P. Morgan Chase
($62; JPM)
1.60
2.6
29
5
24
83
Financials
Wells Fargo ($55; WFC)
1.40
2.6
35
17
22
74
Financials
BlackRock ($369; BLK)
8.72
2.4
45
13
20
70
Financials
Boeing ($154; BA)
3.64
2.4
42
25
12
78
Industrials
Schlumberger
($85; SLB)
2.00
2.3
36
60
12
68
Energy
Texas Instruments
($58; TXN)
1.36
2.3
50
13
22
78
Technology
U.S. Bancorp
($44; USB)
0.98
2.2
32
7
11
80
Financials
Travelers ($107; TRV)
2.20
2.1
21
10
12
98
Financials
Home Depot ($115; HD)
2.36
2.1
51
26
16
70
Discretion.
Macy's ($63; M)
1.25
2.0
28
25
43
78
Discretion.
Amgen ($159; AMGN)
3.16
2.0
36
30
NM
76
Health Care
Corning ($25; GLW)
0.48
1.9
31
20
15
93
Technology
Note: Quadrix scores are percentile ranks, with 10 the best.     NM Not meaningful because company didn't pay dividends five years ago.     e Estimated.

Below we present a 20-stock portfolio that satisfies a different type of income requirement — dividends every month. Three intriguing companies are detailed below.

Corning ($25; GLW) paid the same $0.05-per-share dividend every quarter from the third quarter of 2007 through the same quarter in 2011. Since then, the quarterly payout has risen to $0.12 per share, up 140%. Despite those gains, the dividend expected over the next year represents less than one-third of Corning's trailing earnings. The company's dividend yield of 1.9% is tops among electronic-components makers in the S&P 1500 Index and more than triple the industry average.

In addition to dividend growth, Corning shares its cash with shareholders via stock buybacks. Over the last three years, Corning has invested more than $4 billion in repurchases, enough to reduce its share count 10%.

Corning expects the current positive demand environment for glass to continue this year, driven by global consumers with money to spend on electronics. The consensus projects just 1% higher profits this year, an estimate that leaves room for outperformance. At 16 times trailing earnings, Corning trades at a 20% discount to its industry average. The stock also trades at a discount to its peers on price/book and price/operating cash flow ratios. Corning is a Buy and a Long-Term Buy.


Shares of oilfield-services giant Schlumberger ($85; SLB) have delivered flat returns over the last three months and a negative 20% return over the last six months, dragged down by concerns about a slowdown sparked by unusually low oil prices. However, Schlumberger has held up better than most of its peers; stocks in the industry averaged negative returns of 8% over the last three months and 35% over the last six.

The profit consensus for Schlumberger has dipped sharply in recent months (again, typical for the group) and now projects per-share profits will fall 30% this year and rise 9% in 2016. While we'll stop short of calling for an energy rebound, Schlumberger is better-positioned than most to ride out the storm, and it wouldn't take much of an improvement in the energy market to get those estimates rising again. The company has aggressively cut costs to protect its profit margins and expanded its service offerings in an attempt to grab market share during the downturn.

Operating cash flow rose 15% over the last year, and Schlumberger continues to spend aggressively on dividends. The payout has risen in 10 of the last 11 years, including a 25% hike in January. Schlumberger, yielding 2.3%, is a Long-Term Buy and our top pick in the energy sector.


Natural-gas utility WGL ($52; WGL), added to the Top 15 Utilities portfolio in the Feb. 23 issue of the Forecasts, boosted its quarterly dividend 5% to $0.44 per share last month. The hike marked its 39th consecutive year with an increase. WGL has returned 5% over the last three months and 22% over the last six, tops in its industry. Despite that strong performance, superior growth potential, and encouraging profit-estimate trends, the stock trades roughly in line with the peer-group average at 18 times trailing earnings.

Per-share-profit estimates, already trending higher before WGL topped the December-quarter consensus by 9%, have continued rising. Analysts expect profit gains of 3% this year, versus an industry average of a 4% decline, hurt by tough comparisons to last year's nasty winter. Tack on a 3.5% dividend yield, and WGL offers greater total-return potential than the average utility. That potential,
coupled with a Quadrix Overall score of 86, earns WGL a place among our Top 15.


DIVIDENDS EVERY MONTH

-- Div. Growth --
Company (Price; Ticker)
Div.
($)
Yield
(%)
Payout
Ratio
(%)
1
Year
(%)
5
Years
(Annual.)
(%)
Quadrix
Overall
Score
Sector
Advice
Dividend paid January, April, July, and October
Aetna ($102; AET)
1.00
1.0
15
11
86
83
Health
Focus
Buy *
Comcast
($60; CMCSa)
1.00
1.7
34
28
27
81
Discretion.
Buy *
J.P. Morgan
($62; JPM)
1.60
2.6
29
5
24
83
Financials
LT Buy
Macy's ($63; M)
1.25
2.0
28
25
43
78
Discretion.
LT Buy
Schlumberger
($85; SLB)
2.00
2.3
36
60
12
68
Energy
LT Buy
UGI ($33; UGI)
0.87
2.6
45
15
9
35
Utilities
Top 15
Union Pacific
($118; UNP)
2.20
1.9
38
39
27
90
Industrials
Focus
Buy *
Dividend paid February, May, August, and November
Ameriprise
($134; AMP)
2.32
1.7
27
12
27
99
Financials
Focus
Buy *
Apple ($129; AAPL)
1.88
1.5
25
8
NM
99
Technology
Focus
Buy *
CVS Health
($103; CVS)
1.40
1.4
31
27
29
68
Staples
Buy *
Lincoln Nat'l
($58; LNC)
0.80
1.4
13
25
22
99
Financials
LT Buy
Spectra Energy
($53; SEP)
2.36
4.5
NM
8
8
57
Energy
Top 15
WGL ($52; WGL)
1.85
3.5
65
10
4
86
Utilities
Top 15
March, June, September, and December
Alaska Air
($66; ALK)
0.80
1.2
19
60
NM
99
Industrials
Focus
Buy *
Atmos Energy
($53; ATO)
1.56
2.9
53
5
3
64
Utilities
Top 15
Avista ($33; AVA)
1.32
4.0
67
4
9
37
Utilities
Top 15
Corning ($25; GLW)
0.48
1.9
31
20
15
93
Technology
Buy *
Kroger ($70; KR)
0.74
1.1
23
12
13
89
Staples
Focus
Buy *
Magna Int'l
($109; MGA)
e
1.76
1.6
19
16
76
86
Discretion.
Focus
Buy *
Travelers
($107; TRV)
2.20
2.1
21
10
12
98
Financials
Buy *
*  Also qualifies as a Long-Term Buy.     Note: Quadrix scores are percentile ranks.    
NM Not meaningful because company didn't pay dividends five years ago.     e Estimated.


Why wait for your dividends?

Investors who rely on stock dividends to fund living expenses must give more thought than most to dividend-payment dates. Such investors may appreciate the portfolio presented above, which pays dividends every month. Based on equal weightings for the 20 stocks, the portfolio yields 2.1%.

All 20 of the companies listed have one-year dividend growth of at least 5%, yields of at least 1% and payout ratios of no more than 70%, with the exception of one master limited partnership (MLP). Earnings aren't the primary measure of performance for MLPs, so payout ratios (dividends as a percentage of earnings) don't tell us as much.

The portfolio contains stocks from eight of the 10 market sectors. It's heavily skewed toward financials and utilities, but an equal-weighted portfolio won't have more than 20% in a single sector. All stocks are on one of our Buy Lists or the Top 15 Utilities Portfolio.


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