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All Contents © 2020The Kiplinger Washington Editors
By Ryan Fuhrmann
| December 2016
The stock market has rallied strongly since the election, and the Federal Reserve is officially on track to increase interest rates over time. Retirees are benefitting from higher stock portfolio values and the prospects for higher payouts in their bond portfolios.
But they shouldn’t forget about dividend-paying stocks. They could grow less appealing over time as bond payouts rise, but that could also mean opportunity as they lose favor. Below are 10 stocks that are laser focused on sustaining and growing their dividend yields over time.
And generally (and if not otherwise noted), the below companies also sport reasonable valuations when also taking their growth prospects into account.
Want some tupperware? via Wikipedia
Dividend yield: 5.1%
Tupperware Brands Corporation (TUP) is and has been one of my favorite stocks for retired investors. It is both an income and growth stock. The dividend yield is currently 5.1% to make it one of the highest and safest yields out there.
The main issue with Tupperware is 91% of sales are outside of the U.S. The strong dollar has meant lower reported sales and profits, but the fundamentals of the business are still intact and growing. All for a price-earnings multiple at around 12.
Tupperware is still best known for its namesake parties where a host sells kitchen, storage and related consumer products. Its global sales force is a small army at over 100,000, and its direct-to-consumer model is unique among retailers. In fact, it is one of the best jobs out there for individuals in emerging markets, which accounts for 66% of sales. Several thousand in income can make a big difference in some of these markets.
The yield appears safe because Tupperware generates much more cash flow from its businesses than it pays out in the form of a dividend. Last year, operating cash flow was $226 million, against $138 million for dividends. Net capital expenditure (capital expenditure plus proceeds from selling property and equipment) was only 43.1 million, meaning nearly $45 million left free and clear for other corporate needs, or retaining in the business.
meteo via Flickr
Dividend yield: 2.5%
Progressive Corp (PGR) competes with Berkshire Hathaway Inc.’s (BRK.A, BRK.B) Geico Insurance and is one of the largest auto insurers in the country. Its stated dividend yield of 2.5% is somewhat modest, but still above the market average closer to 2%.
Progressive’s dividend payment is somewhat unique. It is paid annually and based on how much operating profit is generated in its insurance business. The formula is somewhat complicated, but is generally after-tax underwriting income divided by the number of shares outstanding, adjusted for some payouts that management figures out each year.
This variable payout can be missed by investors, and can mean some above-average year payouts. The dividend yield in 2012 and 2014 was 6.67% and 5.53%, or nearly triple the market average. Progressive’s return on equity consistently averages in the mid-teens, which is great for any financial stock. The P/E is 23, which isn’t very low, but the tradeoff is consistent operating results and the chance at a higher payout.
Dividend yield: 3.9%
LyondellBasell Industries NV (LYB) is a large chemical company. About half of its business stems from making ethylene, which is used to make plastic. The current dividend yield is 3.9% and the forward P/E is below 10. Combined, investing in the stock represents a good yield at a reasonable valuation.
LyondellBasell is also in a strong financial position, though it took a bankruptcy back in 2009 to clear debt and reemerge. These days, debt is low and cash flow generation is impressive — last year the firm reported $5.8 billion in operating cash flow. This was against only $1.4 billion in capex, leaving the rest to pay out as dividends ($1.4 billion) and buy back nearly $5 billion in stock.
The company has benefitted more than global competitors because of record-low natural gas prices in the United States. That and a strong financial position have let it expand operations and return billions in cash flow to investors annually. Margins fluctuate along with oil and gas prices, but profits should come in around $10 per share for at least the next couple of years.
Courtesy Gilead Sciences
Gilead Sciences, Inc. (GILD) has been a poor performing stock for several years now, but could see improved fortunes going forward. The stock sports a reasonable dividend yield of 2.5% and can be had for only 6.4 times earnings.
Gilead’s blockbuster treatments for Hepatitis C (HCV) have been both a blessing and a curse. It essentially cures HCV, which of course means not a whole lot of repeat business. Considering the strong growth, the next couple of years could be flat. Rivals AbbVie Inc. (ABBV) and Merck & Co., Inc. (MRK) also offer competing drugs.
Given the success of Solvani and Harvoni for treating HCV, Gilead boasts about $15 billion in cash on its balance sheet. Long-term debt is higher, but there is capacity to buy a rival. Management has a great track record on acquisitions — it acquired Pharmasset to gain its HCV dominance.
Gilead also has a dominant franchise in treating the HIV virus. There isn’t much mention of its pipeline, but there is some potential there for upside and related treatments for both HIV and HCV. The reasonable valuation offers downside protection, and a slight move to even a P/E of 10 means a gain above 30%. Plus Gilead could be bought out by a large pharmaceutical firm given the valuation is so low.
Courtesy Wells Fargo
Dividend yield: 2.7%
Money center bank Wells Fargo & Co. (WFC) has rallied strongly since the election and a Trump-based jump that should enter in an era of less financial regulation. Equally important, the economy is improving and unemployment is low enough that the Federal Reserve is comfortable enough to raise interest rates.
That means financial stocks should remain en vogue for some time going forward. Despite a serious reputational hit where overzealous employees opened fake bank accounts to boost their commissions, Wells is one of the best run large banks in the country.
The current dividend yield is 2.7% and the forward P/E is up to nearly 14, but higher interest rates could help ensure higher net interest margins for all banks. This represents the spread that banks earn between lending to businesses and individuals and “borrowing” from checking and savings account customers.
Like Progressive, Wells boasts a high return on equity. Its ROE averages in the low-teens, but could return back closer to 15% as interest rates rise. This is a true bellwether stock in the banking industry, and it will grow along with the overall U.S. economy over time.
Jim Henderson via Wikipedia
Dividend yield: 2.7%
Prudential Financial Inc. (PRU) is one of the largest life insurers in the world. Like Wells Fargo and other financial stocks, it benefits from higher interest rates.
The stock has also rallied strongly since the election, and stands to be one of the biggest beneficiaries of a rising rate environment. Life insurers are able to invest for the long term considering that its insurance claims are paid out many decades in the future (grimly, when people pass away and their heirs receive the insurance proceeds).
The current dividend yield is 2.7% and forward P/E is about 10.2. Once again, return on equity is one of the best yardsticks to measure the success of a financial company. Prudential’s ROE came in above 13% last year, and also will rise as rates return to more historical averages (read: higher!).
Mike Mozart via Flickr (Modified)
Dividend yield: 2.9%
Phillips 66 (PSX) operates a sizeable chemical business that competes with LyondellBasell, but is best known for midstream assets that help transport crude oil to its also sizeable refining operations.
Phillips 66 has a current dividend yield of 2.8% and trades at about 16 times earnings estimates for 2017. Earnings have been volatile because of falling oil and gas prices, but should recover along with the overall commodity. In fact, the company does usually benefit from uneven pricing where it can make money from the prices it pays for oil and what it sells it for after refining and transporting it.
Warren Buffett’s Berkshire Hathaway owns more than $6 billion in Phillips 66 stock, and recently increased its stake to nearly 15% of the company. That suggests investors shouldn’t expect a quick return, but rather should hold it for the long haul and await a further recovery in oil prices.
Mike Mozart via Flickr
Dividend yield: 6.2%
The rest of the picks focus on the telecom sector. This area of the market continues to benefit as individuals increasingly use their mobile phones and tablets to access the internet and socialize.
Vodafone Group Plc (VOD) is one of the largest global phone providers in the world. It has actually transitioned from purely mobile to add fixed-line capabilities. It also focuses on developed markets, especially in Europe.
The additional business mix may not have increased growth potential (mobile is growing much faster than traditional fixed-line businesses), but it has added diversification and stable market exposure.
This should help support the currently impressive dividend yield of 6.2%. Don’t expect significant sales or profit growth, but India is a large and growing market that should help offset any stodginess in the more developed markets.
Dividend yield: 5%
AT&T Inc. (T) is one of the largest two telecom players in the United States. Its recent acquisition of DirecTV and pending purchase of Time Warner demonstrate it is quite focused on acquiring its way to growth.
Organic growth trends are respectable in the mobile space. Time Warner is up against stiff regulatory resistance, but could add media assets and cut out a middle man in having to pay for outside content. There are worries that it could restrict this content, but these seem overblown at this point.
Overall, AT&T sports an appealing dividend yield of 5% and trades at a reasonable forward P/E of 14.3. It should be able to grow total sales around 5% per year to both support earnings expansion and a higher dividend payment over time.
Dividend yield: 4.3%
Verizon Communications Inc. (VZ) and AT&T are the two largest telecom players in the U.S. Its dividend yield is slightly lower than AT&T’s at 4.3%, but so is its forward P/E at below 14.
Verizon is less acquisitive than its larger rival, but has chosen to grow by acquiring assets more leveraged to an increase in mobile and digital advertising. It snapped up AOL in recent years and has set its sights on Yahoo! Inc. (YHOO), if recent data thefts don’t undo the merger agreement.
A solid strategy might be to own a position in Vodafone, AT&T and Verizon. All benefit from the growing trends of online and mobile data, with Vodafone adding important international exposure.
This article is from Ryan Fuhrmann of InvestorPlace. As of this writing, he was long shares of LyondellBasell, Tupperware, Gilead, Wells Fargo, Time Warner, and Phillips 66, but did not hold a position in any of the other aforementioned securities.