The High-Yielding Ones

With interest rates at rock-bottom levels, income is hard to find in this environment. Stocks that pay nice dividends are a good place to look.

This is inherently a long-term approach to investing, not about quick flips. However, you don’t want to buy a stock just because it has a 3% yield, and then see its price fall five or six percent over the next few weeks.

The Zacks Rank is simply one of the best short-term timing tools ever discovered. A good dividend yield and a Zacks #1 Rank (Strong Buy) are not mutually exclusive. The Zacks #1 Rank is given to the most attractive 5% of stocks in the Zacks universe based mostly on positive earnings surprises and upward estimate revisions. Yield simply does not enter the picture in calculating the Zacks Rank.

Ideally, you want stocks that not only pay a nice dividend today, but ones that will increase that dividend over time. What you want to avoid are stocks that pay a big dividend now, but then slash their payouts after you buy them.

The payout ratio is the first thing to focus on to make sure the dividend is safe. A low payout ratio means that the company is keeping some of its earnings to reinvest in the business and grow it. Boards of directors are not going to increase dividends, and might even cut them, if the company is not earning enough to both pay the dividend and to keep the company competitive.

Also, the first cut is the hardest. So all things being equal, you would rather have companies with a recent history of dividend increases and avoid those that have recently cut their dividends.

The Most Promising High-Yielders

The screen below shows six stocks that I think are worthy of consideration. All currently hold a Zacks #1 Rank. All have current dividend yields of more than 3.0% (or almost as much at the 10-year T-note). All have payout ratios of less than 70%, meaning that they are holding on to at least 30% of their earnings to reinvest and grow the business. None has cut its dividend in the last five years.

There are a wide variety of market capitalizations to choose from. Philip Morris (PM - Analyst Report), the producer of Marlboros everywhere in the world except for in the U.S., is by far the largest, with a market capitalization of $126 billion. Since it does not operate here in the U.S. it is insulated from any U.S. legal problems, and class action suits are not very common overseas. Cigarettes provide enormous free cash flow, and the sales of them are not very economically sensitive.

The other market-cap giant on the list is DuPont (DD - Analyst Report). It is clearly more economically sensitive than is Phillip Morris. However, the world economy does seem to be recovering. DuPont is also a good back-door play on the farm economy as it is a major producer of hybrid seeds and of agricultural chemicals (herbicides, pesticides, etc). The farm economy has been extremely strong due to high crop prices.

Olin (OLN - Snapshot Report) is the other Chemical firm on the list. It is a bit more commodity-oriented in terms of the mix of chemicals it produces than DuPont, but it has a second line, ammunition, through its ownership of Winchester.

Not surprisingly, there is an electric utility on the list. This is, after all, a story about high-yielding stocks, and the electric utilities have long been the prototypical “widows and orphans” income stocks. Portland General Electric (POR - Snapshot Report) though is one of the nation’s leaders when it comes to generating electricity from non-fossil fuel sources. It serves almost a million customers in Oregon.

While large-cap stocks tend to pay more in dividends than small-caps, not all good income producers have to be huge. German American Bancorp (GABC - Snapshot Report) makes the list with a market capitalization of just $211 million. No, it is not exposed to any of the Eurozone troubles. All of its business is actually in Southern Indiana. This solid if somewhat sleepy little bank never had to take TARP funds, and has bought up other small banks in its region in recent years. In-market bank acquisitions are generally much more successful than out-of-market ones. The downside, of course, is that the bank is not as geographically diversified.

As always, a screen like this should only be the starting point for your investment investigation. However, if you want income, this is as good a place as any to start.