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With long-term interest rates near record lows, it is very hard for investors to find income. Dividend-paying stocks are an obvious alternative, but people have been scared off by the recent market volatility and by fears of a new economic downturn.
If you are a long-term investor, those sorts of fears should be your friend, not your foe. Unless you buy into the Mayan Calendar "end of the world"-type stuff, the odds are that strong companies with conservative balance sheets that provide needed goods and services will still be around, or if they are not around it will be because of a takeover, not a bankruptcy.
Stocks Over T-Bills
Ten years from now, the vast majority of firms will probably be earning more than they are today, and hence will probably be paying higher dividends. If you buy a long-term bond, you know for sure that the coupon payment is not going to rise. Valuations on stocks are not particularly stretched on an absolute basis, and relative to the level of interest rates, we are at some of the most attractive levels seen over the last half century.
A long-term investor should really be concerned about what the price of the stock will be ten years from now -- not ten days from now, or even ten months from now. On the other hand, nobody wants to see their investment drop right after they buy it. It is not a lot of fun buying a stock to get a 3.5% dividend yield, only to see it drop by 5.0% over the following week.
The Table below shows six investment ideas for income. All currently provide dividend yields in excess of the yield on the 30 year T-bond. To guard against short term drops, all have Zacks Ranks of either One (Strong Buy) or Two (Buy), which put them in the top 20% of all stocks based on earnings and earnings estimate momentum.
The Zacks Rank is simply the best short-term trading indicator I have ever found, and a rank of #1 or #2, while not perfect protection against short term drops (say over the next month or two), is about as good a form of protection as you are going to find.
If one is looking for income, the first thing one wants to look for is a good dividend yield. But don't stop there. More money has been lost reaching for yield than at a point of a gun. Dividend payments are not guaranteed, and if a company cuts its dividend, the stock price usually heads south in a big way. Not only don’t you get the income you were counting on, but your principal is greatly diminished.
To guard against that happening, look at the Payout Ratio. If a company is paying out all of its earnings as dividends and business turns south even a little bit, it will be hard for the company to maintain the current dividend, let alone raise it.
All of the companies below have payout ratios of under 70%, and half are currently paying out less than half of their earnings. That means they have an ample cushion to continue paying the current level. It also means that they are able to reinvest in their business and thus increase earnings in the future. That is what will allow them to increase future dividends.
Also, the first dividend cut is the hardest one for company boards to make. Thus, I eliminated all companies that have not grown their dividends over the last five years. While the dividend growth rates of the six firms shown are not spectacular, they do look to be sustainable.
If one makes the assumption that the dividend growth over the next five years will equal what it has been over the last five years (which were pretty rough years for the economy), and that the company yields the same five years from now as it does today, then your total return will equal the sum of the current yield and the dividend growth rate. I know what happens when you assume, but extrapolating a growth rate of 5-10% is a lot more plausible than extrapolating a 30-40% growth rate.
Look for Solid Balance Sheets
The other cause of companies having to cut their dividends is if they run into financial trouble. Thus I looked for only those firms with solid balance sheets. My somewhat arbitrary definition of a "solid" balance sheet was having debt be less than half of the total capitalization of the company. Large firms tend to have higher survival rates than small firms, so I also required a minimum market capitalization of more than $1 billion.
In the current environment, financial firms have their own sets of issues, so to narrow down the list I eliminated all financial firms from the list. I also got rid of ADR’s and non-common stocks structures, such as master limited partnerships (MLP). Those can be perfectly good income vehicles, but often have tax complications (mostly just more paperwork).
Following the table are the company descriptions abridged from Yahoo Finance. This post is based on a screen. A screen should be the starting point for your investment investigation, not the end point.
Here are six promising ideas. The Prices and Yields are as of the close 10/7/11.
|Company||Ticker||Dividend Yield||Payout Ratio||Div 5-Yr Growth||Debt/Total Cap||Zacks Rank||P/E Using Next FY Est||Market Cap ($mil)|
|Northwest Nat G||NWN||4.07%||0.67||5.15%||43.57%||2||15.68||$1,142|
|Foot Locker Inc||FL||3.57%||0.49||9.52%||5.99%||2||10.51||$2,846|
|Du Pont (Ei) De||DD||3.47%||0.43||2.34%||49.92%||1||10.03||$43,900|
Northwest Natural Gas Company ([url=http://www.zacks.com/stock/quote/nwn]NWN[/url], $44.76) stores and distributes natural gas primarily in Oregon, Washington, and California. It has approximately 674,000 utility customers comprising approximately 611,000 residential, 62,000 commercial, and 1,000 industrial customers. It holds interests in approximately 9,900 net acres of underground natural gas storage in Oregon and approximately 5,000 net acres of underground natural gas storage in California.
Genuine Parts Company ([url=http://www.zacks.com/stock/quote/gpc]GPC[/url], $52.00) distributes automotive replacement parts, industrial replacement parts, office products, and electrical/electronic materials in the United States, Puerto Rico, Canada, and Mexico. It owns and operates automotive parts distribution centers and automotive parts stores under the NAPA name. It also distributes Industrial, office and electronic supplies.
Foot Locker, Inc. ([url=http://www.zacks.com/stock/quote/fl]FL[/url], $21.10) together with its subsidiaries, operates as a retailer of athletic footwear and apparel. The company operates in two segments, Athletic Stores and Direct-to-Customers. The Athletic Stores segment retails athletic footwear, apparel, accessories, and equipment. As of January 29, 2011, it operated a network of 3,426 primarily mall-based stores in the United States, Puerto Rico, the U.S. Virgin Islands, Guam, Canada, Europe, Australia, and New Zealand.
Questar Corporation ([url=http://www.zacks.com/stock/quote/str]STR[/url], $18.55) operates as an integrated natural gas holding company. The company develops and produces natural gas and crude oil from its properties located in the Rocky Mountain region. The company owns and operates approximately 2,568 miles of interstate pipeline with total firm-capacity commitments of 4,744 Mdth per day transporting natural gas from Rocky Mountain producing areas to other pipeline systems, distribution systems, and other utility systems.
E.I. du Pont de Nemours and Company ([url=http://www.zacks.com/stock/quote/dd]DD[/url], $41.40) operates as a science and technology company worldwide. It operates in seven segments: Agriculture & Nutrition, Electronics & Communications, Performance Chemicals, Performance Coatings, Performance Materials, Safety & Protection, and Pharmaceuticals.
Eaton Corporation ([url=http://www.zacks.com/stock/quote/etn]ETN[/url], $38.63) operates as a power management company worldwide. It provides electrical components and systems for power quality, distribution, and control; hydraulics components, systems, and services for industrial and mobile equipment; aerospace fuel, hydraulics, and pneumatic systems for commercial and military use; and truck and automotive drivetrain, and powertrain systems for performance, fuel economy, and safety.
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