2015 Dividend Playbook: Safe Stocks With Yields Above 4%
As I noted in my preview of this multi-part look at dividend payers, few investors are pleased with the fact that 10-Year Treasuries yield is less than 2%.
#-ad_banner-#Not only is that yield insufficient to generate acceptable income streams, but investors could see bond-oriented investments lose value when rates finally start to rise.
To be sure, fixed-income rates are unlikely to budge much in 2015. The Fed may start to hike the Fed funds rate by mid-year, but they’ll be moving slowly.
In normal times, a boost in the Fed funds rate would also have an impact on long-term rates as well, which I noted in 2013 when discussing the yield curve. But these are not normal times. So the rate on the 10-Year may not move all that much, even as short-term rates rise.
That’s why dividend stocks will likely remain in vogue once again this year. There are several ways to approach these stocks, and today, I am focusing on stocks that carry yields in excess of 4.0%, and equally important, are extremely likely to maintain stable payouts.
To be sure, the ongoing bull market has lifted stock prices to such an extent that dividend yields in excess of 4% are becoming harder to find. Of the 1,500 companies in the S&P 400, 500 and 600, just 114 of them offer such yields. In some respects, many of these stocks are the Goldilocks of income stocks. Their yields aren’t so low as to be insulting. Yet they are not so high as to represent too much risk.
But even in this group, looks can be deceiving. AT&T, Inc. (NYSE: T), which has maintained or boosted its dividend for 21-straight years, quite suddenly looks vulnerable to a range of competitive headwinds. Short sellers now appear to be anticipating that the dividend needs to be reduced in the coming year.
Casino operator Wynn Resorts Ltd. (Nasdaq: WYNN), with a 4% dividend yield, may also seem like a built-to-last income producer. But Wynn’s divided history is quite erratic, and an economic slowdown would lead to the next dividend cut.
Instead, focus on companies that are economically insensitive, with a proven track record of dividend growth. Such companies typically operate in mature, yet stable, industries, control their own pricing and are committed to delivering solid, if unspectacular, profit margins and returns on equity.
Let’s take Lamar Advertising Co. (Nasdaq: LAMR) as an example. As long as there are interstate highways in the future, this company’s 145,000 billboards will get lots of attention. The company also operates a similar number of logo signs, which tell you what food, lodging and culture options await you at the next highway exit.
Lamar recently converted its corporate structure, becoming a real estate investment trust. The recent conversion may explain why Lamar has never popped up on your dividend screens before. The company currently sports a 6.1% dividend yield — roughly $3.40 a share.
This business model is somewhat recession proof: Lamar has generated earnings before interest, taxes, depreciation and amortization of at least $400 million for eight-straight years. That means it survived the 2008 recession with business trends reasonably intact.
Sometimes, you have an opportunity to capture solid and stable yields when a business model is out of favor with investors. Right now, investors are fretting over the dimming luster of Barbie dolls, which has pushed shares of Mattel, Inc. (Nasdaq: MAT) to multi-year lows. The share price pullback has pushed the dividend yield up to 5.2%.
Mattel and its rival Hasbro, Inc. (Nasdaq: HAS) seem to lose their mojo periodically. Yet, even when faced with pressures such as Mattel is seeing now, they generate consistently impressive cash flow. Mattel, for example, has maintained or boosted its dividend for 13-straight years. The near-term sales challenges for Mattel may mean that its 5.2% dividend stays flat for a year or two. But eventually, the dividend payout will be back in growth mode when management rejuvenates the product line-up.
Healthcare is another steady-eddy industry. That’s especially true for the companies that own and lease real estate to healthcare firms. One of my favorites is Omega Healthcare Investors, Inc. (NYSE: OHI), which has boosted its dividend between 9% and 18% in seven out of the past eight years. The current yield stands at 5% for this REIT.
Focusing on such solid dividend growth highlights the core appeal of dividend stocks. Investors who paid $10 a share for this stock back in 2007 now enjoy a $2 annual dividend. That’s like locking in a 20% future yield, simply for being patient. You won’t find any sort of fixed-income investment that may produce such a robust future income stream.
Risks To Consider: Dividend-producing stocks are not bulletproof. At some point in the next few years, fixed income yields will begin to rise, dimming the relative appeal of equities. Indeed, when the 10-Year Treasury Bill started to deliver a rising yield in the middle of 2013, dividend-producing stocks experienced a sell off.
Action To Take –> In some respects, these are buy-and-hold investments rather than timely trades. Dividend yields in excess of 4% typically correspond with very mature business models. They’re capable of dividend growth and often carry a low beta, but should not be the only category of dividend stocks that you focus on.
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