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All Contents © 2017The Kiplinger Washington Editors
By Daren Fonda, Senior Associate Editor
| August 2017
Plenty of stocks yield more than the market average of 2% for large companies. But if you’re investing for income, you’ll want dividends that are both reliable and secure. And that’s not always easy to find.
Consider what recently happened with Teva Pharmaceutical Industries (symbol TEVA, $18.29). Shares of the drugmaker yielded more than 4% a few weeks ago. But the stock has lost more than a 41% since its close on August 2, the day before Teva issued a grim financial report and slashed its quarterly dividend from 34 cents to 8.5 cents a share.
These seven stocks aren’t likely to cause any such pain for investors. These businesses boast sales and profits ample enough to comfortably cover their dividends. Two of our picks are financially healthy drugmakers with strong lineups of medicines in development. Our other selections include energy companies, a real estate investment trust and a firm that owns global infrastructure assets, such as ports, railways and toll roads.
Granted, these aren’t fast-growing businesses, and their stocks won’t be market superstars. But they should produce modest share price gains to go along with their dividends, resulting in robust total returns. All of the stocks yield well above 3%, which is more than you can earn in investment-grade bonds and other high-quality income investments.
Prices and data are from August 8, 2017. Click on ticker-symbol links in each slide for current prices and more.
Share price: $43.09
Market value: $11.54 billion
Estimated 2017 sales: $3.4 billion
Dividend yield: 4.0%
Based in Toronto, Brookfield owns a diverse collection of infrastructure assets around the world, including natural gas pipelines, ports, railways, toll roads and utilities. Most of these assets generate steady cash flow, typically based on fees paid by customers. Structured as a partnership, Brookfield shells out most of its net income as distributions to investors (after covering its expenses and setting aside money for reinvestment).
Brookfield should steadily increase its payouts, too. The firm says it has a backlog of projects worth $2.4 billion, including deals such as the pending purchase of more than 40,000 cell-phone towers in India and the acquisition of a water irrigation system in Peru. Brookfield issues a lot of debt to fund these deals and would be hurt by a sharp rise in interest rates. But its debt load appears manageable. The firm says it recently received a “significant upgrade” to its credit ratings after it paid off some bonds, thereby shoring up its balance sheet.
Brookfield has a long history of increasing its dividend and is currently targeting a raise of 5% to 9% a year.
Share price: $113.77
Market value: $18.5 billion
Estimated 2017 sales: $2.3 billion
Dividend yield: 3.3%
A real estate investment trust, Digital Realty is benefiting from some powerful technology trends. The firm owns more than 150 data centers—giant facilities where companies keep computer servers and networking equipment. Demand for Digital’s properties is running strong as businesses and consumers store more data in the “cloud.” Companies want to locate their servers near each other, too, making data centers a critical digital hub.
Already one of the largest data-center owners, the firm is getting bigger: It announced plans in June to acquire rival DuPont Fabros in a deal worth $7.6 billion (including debt). DuPont’s 12 data centers “fit well” with Digital’s existing U.S. locations, says analyst Keith Snyder, of research firm CFRA. With prime locations in Virginia, Chicago and the Silicon Valley, DuPont’s data centers should also help the combined firm attract more blue-chip customers.
Digital issues a lot of debt to build and acquire properties, and its financing costs would climb if interest rates were to increase sharply, pressuring the stock. But even if the shares struggle in the immediate aftermath of a rate hike, they are likely to recover as profits increase. Snyder expects sales to rise 5.8% in 2017 and 6.7% in 2018. That should support a healthy 7.3% increase in Digital’s funds from operations (for a REIT, roughly equivalent to corporate profits) in 2018, he estimates.
Share price: $79.96
Market value: $339 billion
Estimated 2017 sales: $257.8 billion
Dividend yield: 3.9%
Exxon Mobil pumps out the equivalent of more than 4 billion barrels of oil and gas a year—output that dwarfs that of every other publicly traded energy producer. The firm also runs refineries and chemical manufacturing plants, giving it a stake in just about every facet of energy production.
Size alone isn’t what makes Exxon attractive, though. The firm maintains one of the strongest balance sheets in the business, earning a coveted triple-A credit rating from Moody’s Investor Service (although S&P grants Exxon a slightly lower double-A rating). It’s also an efficient oil and gas producer. The firm’s energy production business was able to break even in the second quarter (on a cash cost basis) with prices at about $35 a barrel, estimates Bank of America Merrill Lynch. That is the lowest break-even point of the major oil companies, Merrill says, and it provides Exxon with financial support should oil prices cascade back toward that level (down from about $49 now).
Even if oil prices slump, Exxon’s dividend should be safe. The firm’s payout has edged up each year for decades, including gains in 2014 and 2015, when oil prices collapsed. Over the past 34 years, the dividend has increased at an average rate of 6.4%.
Granted, this stock will need higher oil prices to move up. But with the shares near their 52-week lows, investors are likely buying near the bottom. Rating it a “buy,” BofA expects the stock to hit $90 over the next year.
Share price: $67.50
Market value: $15.4 billion
Estimated 2017 sales: $2.5 billion
Dividend yield: 5.3%
An energy master limited partnership, Magellan operates one of the country’s longest pipelines for fuels such as gasoline and diesel, spanning 9,700 miles from the Gulf of Mexico to the Upper Midwest. Magellan also transports crude oil and provides oil storage in Oklahoma and other locales. Energy producers pay fees to transport and store their products with Magellan, creating steady cash flows based on the volume of oil and gas the firm handles.
Magellan isn’t the highest-yielding energy MLP. But it’s conservatively managed with a relatively high credit rating, and it’s one of the few that doesn’t owe distribution payments to a parent firm, leaving more cash for investors (called unit holders). Since 2001, Magellan’s payouts climbed at a 12% average annual rate, according to the firm, rising even as oil prices plunged in 2014 and 2015. The firm is targeting 8% annual distribution growth in 2017 and 2018, aiming to boost revenues as it builds new pipelines and develops other cash-generating assets, such as two marine terminals in Texas.
One caveat for investors: The tax treatment for income from MLPs is complicated, requiring investors to file K-1 forms with the Internal Revenue Service. Consult a tax expert before investing.
Share price: $84.16
Market value: $196.9 billion
Estimated 2017 sales: $48.4 billion
Switzerland-based Novartis lost patent protection for its best-selling cancer drug, Gleevec, last year—a product once worth nearly $5 billion in annual sales. Yet while sales of Gleevec have fallen sharply—to $506 million in the second quarter, down 42% from the prior-year period—Novartis is plugging the revenue gap with other medicines, including its heart drug Entresto and immunology drug Cosentyx, used to treat psoriasis and inflammatory arthritis.
Novartis is also making strides in gene therapy—a potentially revolutionary new method to treat cancer. The treatment involves extracting a patient’s cells, genetically altering them to attack the disease, and then reinjecting them into the patient. The technique is expensive and, so far, limited to a small number of patients with rare forms of leukemia. But it appears close to winning full FDA approval and could transform cancer care, extending to more patients with different types of cancer.
Another growth area for Novartis is generic versions of biotech drugs. The firm’s Sandoz unit recently won approval in Europe to make a generic version of Enbrel, a best-selling drug used to treat rheumatoid arthritis. Novartis is now working on generic versions of Humira and Remicade—some of the biggest biotech drugs on the market, both used to treat arthritis, Crohn’s disease and other conditions—with approvals likely over the next year or two.
Overall, Novartis’s strong development lineup, and sales of generics and other products “should translate to steady growth over the long term,” says Morningstar analyst Damien Conover. Investors can also count on Novartis’s dividend staying intact, supported by the firm’s steady revenues and long-term earnings growth.
Share price: $33.28
Market value: $198.7 billion
Estimated 2017 sales: $52.9 billion
Dividend yield: 3.8%
With annual sales topping $52 billion, Pfizer ranks as one the world’s top drug makers. Two of its major products, Lyrica (for neuropathic pain) and Viagra (erectile dysfunction), will lose patent protection over the next 24 months, resulting in losses of revenue. But Pfizer has produced some big hits that are racking up sales, including a medication for rheumatoid arthritis (Xeljanz) and a new treatment for breast cancer (Ibrance). Sales of those and other drugs are helping to keep Pfizer’s overall revenues aloft; analysts estimate that Pfizer will lift sales by 2.2% in 2018, according to estimates compiled by Zacks Investment Research.
Even without much sales growth, Pfizer’s bottom line should rise by about 6% in 2018, analysts estimate, boosted by cost cutting and share buybacks. With that kind of growth, investors can reasonably expect Pfizer’s dividend to increase. The firm now distributes 52.5% of its profits as dividends, according to Zacks, leaving plenty of room for a raise.
Share price: $48.60
Market value: $198.3 billion
Estimated 2017 sales: $124.9 billion
Dividend yield: 4.8%
Verizon’s stock may not be a highflier. But with a 4.8% dividend yield, it looks more compelling than intermediate-term, investment-grade corporate bonds, which yield an average of 2.7%. Unlike most bonds, Verizon also offers potential for healthy, long-term price gains.
With more than 114 million customers, Verizon rakes in cash from subscribers who pay monthly fees for its phone, internet and TV service. Verizon is now expanding beyond those areas, delving into internet content (with its purchases of AOL and Yahoo) and telematics: (GPS tracking and connectivity services for truck fleets and other vehicles).
Verizon spends heavily to maintain and upgrade its networks—costing more than $17 billion a year in capital expenditures. The firm also faces stiff competition for wireless customers and is battling industrywide price wars. But some analysts expect the industry to consolidate, with Sprint potentially merging with T-Mobile or Charter Communications.
Less competition in the industry could strengthen prices for wireless carriers. Verizon also benefits from the “most defensible wireless subscriber base in the industry with superior profitability,” says Bank of America Merrill Lynch. Rating the stock a “buy,” BofA says Verizon’s earnings growth should outpace that of its peers, producing hefty dividends and modest price gains.
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