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All Contents © 2018The Kiplinger Washington Editors
By Daren Fonda, Senior Associate Editor
| October 10, 2017
Investors looking for dividend income won’t find much of it by investing in the average large-company stock. Standard & Poor’s 500-stock index—the major large-cap benchmark—yields just 2%, down from 2.1% a year ago. Investors can scoop up a bit more income in shares of gas and electric utilities, yielding an average of 3.2%. But that’s not much when you factor in inflation, which is running at a nearly 2% annualized rate.
Venture beyond the S&P 500, however, and you’ll find dozens of stocks yielding 5% or more. These aren’t all common stocks. Many are classified as master limited partnerships (MLPs), limited partnerships (LPs) or American depositary receipts (ADRs), which are shares of foreign companies that are listed on a U.S. exchange. These types of securities (along with a few others) aren’t eligible for inclusion in the S&P 500. But that doesn’t make them bad investments. And some look quite compelling as income generators.
Here are five picks (including one in the S&P 500) that yield 5% or more. Each should be able to maintain its payout rate based on its solid underlying business. If their share prices increase by a modest 2% a year—well below the long-term market average—investors can expect annualized total returns, including dividends, to top 7%.
Data is as of Oct. 5, 2017, unless otherwise indicated. Click on symbol links in each slide for current share prices and more.
Share price: $39.51
Market value: $242.6 billion
Annual dividend: $1.96
Dividend yield: 5%
The big wild card with AT&T these days is its proposed merger with Time Warner (TWX)—owner of TV networks (such as HBO) and the Warner Bros. movie studio. The U.S. Justice Department is currently reviewing the deal—valued at $85 billion in cash and stock—and will likely make a decision by the end of the year to either block the merger or approve it with some conditions attached.
Whatever the outcome, investors will get their dividends. AT&T hasn’t missed a payment in decades and isn’t likely to break that streak. With a steady revenue stream—backed by more than 136.5 million subscribers to its wireless and other services—the firm produces abundant free cash flow (the cash profits generated after making the capital expenditures necessary to maintain the business). In the 12-month period that ended June 30, AT&T reported $15.8 billion in free cash flow, more than enough to cover its dividend payments of $11.9 billion.
Granted, AT&T’s stock may be sleepy, at best. The firm is likely to issue a lot more debt and stock to help fund the Time Warner deal, pressuring its balance sheet and potentially its stock. Bank of America Merrill Lynch expects the shares to reach just $39 over the next 12 months, barely moving from recent prices.
Stick with the stock, though, and you’ll likely get a dividend increase. The firm has hiked its payout by an average of 2.2% over the past five years. Backed by ample free cash flow, AT&T can afford to keep raising its dividend modestly.
Share price: $33.62
Market value: $21.8 billion
Annual dividend: $2.16
Dividend yield: 6.4%
Asset manager Blackstone Group handles more than $371 billion in investments, including private-equity funds, mutual funds and commercial real estate that the firm directly owns. Some of the firm’s revenues come from investment income, interest and dividends. But most of it flows from the huge fees Blackstone charges, based on the size and performance of the funds and other investments it manages.
Altogether, Blackstone hauled $1.5 billion in revenues in the second quarter, up about 30% over the same period a year earlier. After expenses, the firm reported that its “distributable earnings” (effectively the cash paid to shareholders) amounted to 63 cents per share (technically, per unit), up 58% over the prior year.
A prolific deal maker, Blackstone is likely to plow more money into financial assets and real estate over the next few years, too. The firm is a “fundraising machine,” says Credit Suisse, with a strong record of raking in money from big investors such as universities, pension funds and foreign governments.
In May, for instance, Blackstone said that it would launch a new $40 billion fund to invest in infrastructure assets such as toll roads and pipelines, seeded by $20 billion from the government of Saudi Arabia’s investment fund. Those kinds of deals could help push Blackstone’s payout to $6 per share over the next five years, estimates Credit Suisse, well above the firm’s current annualized payout rate of $2.16 per share.
Blackstone isn’t bulletproof, though. A prolonged slump in financial markets would erode asset values and fees. Worst-case, Blackstone could cut its distribution, which would pull down the stock. For now, though, distributions should roll in based on the firm’s fee income and gains in asset prices.
One other note: Structured as a limited partnership, Blackstone issues K-1 forms, rather than a standard 1099 form, for income payments. Distributions may be a mix of capital gains, dividends, interest and other types of income, some of which may complicate your taxes.
Share price: $26.29
Market value: $56.5 billion
Annual dividend: $1.68
One of the largest energy master limited partnerships, Enterprise Products Partners runs a vast network of oil-and-gas pipelines, processing plants, storage depots and export facilities. Oil drillers and other energy producers pay Enterprise fees to transport and process their products, and the revenues flow in based largely on the quantity of oil and gas that Enterprise handles, rather than the price of the commodities.
For income investors, the stock looks solid. Enterprise has raised its payouts for 18 consecutive years. The firm didn’t miss a quarterly increase when oil prices plunged in 2014 and 2015. Distributions have increased at a 6.5% annualized rate since 2004.
Enterprise is investing heavily to keep hiking its payouts, too. The firm says it plans to spend $6 billion through 2019 on new pipelines and other projects that will bring in more cash. One example: a new propane processing plant in Texas that the firm recently started up, with 100% of its capacity contracted for the next 15 years.
The major risk is that energy prices retreat, resulting in lower domestic oil-and-gas production and less demand for pipelines. Enterprise may still make its distributions, but the stock could slide in that scenario.
One other caveat: MLPs issue K-1 forms that may complicate your tax filings. Consult a tax expert before investing.
Share price: $19.29
Market value: $8.2 billion
Annual dividend: $1.08
Dividend yield: 5.6%
A real estate investment trust, Kimco Realty owns more than 500 shopping centers throughout the U.S. That might seem like a dying business: Online competition is pressuring sales at department stores and other traditional merchants. Property owners are seeing vacancies rise, and some are lowering rents or making other concessions to tenants to try to keep them in place.
Yet Kimco appears to be weathering this “retail apocalypse,” as it’s known, quite well. The firm has been aggressively selling properties and redeveloping others to focus more on internet-resistant businesses such as health clubs, off-price retailers, warehouse stores and wireless-service providers. Although the firm has lost some tenants, its overall occupancy rate has increased from 93.3% in mid 2012 to 95.5% (as of June 30, 2017). Rent per square foot has also risen, climbing at a 5% annualized rate over the past five years.
Overall, Kimco hauls in more than enough rental income (after covering its expenses) to pay its dividend. Kimco’s funds from operations—a common REIT profitability measure that represents net income plus depreciation expenses—amounted to 41 cents a share in the second quarter, well above the firm’s quarterly dividend of 27 cents a share. Investors are likely to receive a dividend increase over the next year, too, says Bank of America Merrill Lynch, which expects the quarterly payout to reach 28 cents a share, up 3.7%.
Share price: $61.03
Market value: $264.2 billion
Annual dividend: $3.76
Dividend yield: 6.2%
Many energy producers may be banking on oil prices recovering back to $100 a barrel, up from about $50 now. But Royal Dutch Shell isn’t one such optimist. One of Europe’s largest oil-and-gas producers, Royal Dutch says it has instituted a “lower forever” mindset regarding oil prices, and it’s put its business on a diet to make money in that climate.
The company has cut operating expenses by more than 20% since 2014 and slashed its yearly capital investment budget by more than $20 billion (down from $50 billion in 2014). Royal Dutch is also paying down debt, strengthening its balance sheet as a result. And it has started production at several new oil-and-gas projects to pump up revenues.
The results are now showing up in the bottom line: The company reported earnings per share of $1.96 in the 12-month period that ended June 30, up by 70% over the previous 12 months.
More important for dividend investors, Royal Dutch now earns more than enough money from oil-and-gas production, after covering its expenses, to make its payouts. The firm paid a dividend of $3.76 per share in the last 12 months, covered by $5.96 in free cash flow. Although the firm isn’t likely to increase its dividend substantially (unless oil prices rebound well above current levels), investors should rake in payouts that beat the yields of many other big energy stocks.
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