5 High-Yielding, Cheap Dividend Picks
With savings accounts and U.S. T-Bills yielding next to nothing, one has to be on the search for yield. One of the best ways to this is with dividend paying stocks. We have identified five stocks that are "buys," cheap and should be on every investor's watch list.
We have found five dividend payers that all have low volatility, making them solid picks amidst an uncertain economic backdrop, not to mention less dependent on the overall economy. The total realized return over the last five years stack up as follows for our five picks:
- Altria 25%
- AT&T 20%
- Verizon 27%
- American Capital Agency 26%
- Annaly Capital 8%
Meanwhile, over the same three-year period these companies have managed an impressively low beta.
- Altria (MO) 0.4
- AT&T (T) 0.4
- Verizon (VZ) 0.3
- American Capital Agency (AGNC) 0.2
- Annaly Capital (NLY) 0.1
1. Altria Group, Inc.
- Dividend Yield 5.30%
Altria Group manufactures Marlboro cigarettes; smokeless tobacco products Copenhagen, Skoal, Red Seal, Husky, and Marlboro Snus brands; Black & Mild cigars; and wines under Chateau Ste. Michelle and Columbia Crest brand. Altria Group is the ultimate sin stock, but it throws off plenty of cash. Tobacco and alcohol products are highly profitable. The company dominates the U.S. tobacco market. Tobacco sales are very consistent along with the company's dividends for almost a century now. Altria has a forward P/E of 13.15 and has operating margins of 41.72%. The company's return on equity is an amazing 120.91%. Altria is an extremely profitable and cheap stock based on the company's earning power and balance sheet. We also consider Altria as one of the best picks in the tobacco industry, along with British Tobacco (read the rest here).
The next two companies hale from the cash rich telecom industry. AT&T and Verizon have both managed to grow their dividends payments nicely over the last five years, AT&T at 2.3% annually and Verizon at 3.6% (read more about AT&T and Verizon head-to-head).
2. AT&T, Inc.
- Dividend Yield 5.00%
AT&T is a wireless and fixed line global telecommunications company. It is the 17th largest corporation in the world by market value and has over 100 million mobile telephone customers. The telecommunications business is highly profitable and there are huge barriers to entry. AT&T along with Verizon dominate the U.S. telecom market. AT&T has a forward P/E of 13.37% and an operating margin of 10.20%. Piper Jaffray recently reiterated an "Overweight" rating on the stock and their target is $40. AT&T closed on Monday at $36.23.
3. Verizon Communications, Inc.
- Dividend Yield 4.40%
Verizon Communications is the chief competitor to AT&T and the two of them basically control the U.S. telecom market. Anyone who has a cell phone in the U.S. probably has either Verizon or AT&T as their carrier. That's why Verizon is such an attractive dividend play along with AT&T. Chances are that every month, one of these two companies get money from you or someone in your family for their cell phone bill. In comparing the two, AT&T has a slightly better dividend yield of 5.00% versus Verizon's yield of 4.40%. But in looking at the financials, you'll see that Verizon has better margins. Verizon has a forward P/E of 15 and an operating margin of 12.04%. Verizon's return on equity is an impressive 12.32%. Piper Jaffray also has an "Overweight" rating on Verizon with a target of $50. Verizon closed on Monday at $47.11. The stock is up 20% in the past year. Billionaire Jim Simons also increased his stake in Verizon by over 2,800% last quarter (see Simons' top picks).
4. American Capital Agency Corp.
- Dividend Yield 15.00%
American Capital Agency Corp. is a real estate investment trust that invests in collateralized mortgage obligations (CMOs) that are guaranteed by the US government. As a REIT, the company distributes 90% of its income to shareholders. Of the 20 analysts that follow the company, four have it rated as a Strong Buy, 13 as a Buy and seven as a Hold. One of the most attractive aspects to owning American Capital is that management is considered one of the best in managing agency debt. Company President Gary Kain previously worked at Freddie Mac as Head Trader and Senior Vice President and knows the mortgage REIT business inside and out. American Capital is also one of the mortgage REITs that has seen robust insider buying of late, including purchases by the CEO (see the rest here).
5. Annaly Capital Management, Inc.
- Dividend Yield 11.80%
Annaly Capital Management is another mortgage REIT like American Capital, except it yields slightly less. Annaly is the largest mortgage REIT in the business. The company has consistently delivered earnings growth year after year. Return on equity has been averaging 10.9% and the average dividend yield has been double digits. Annaly has delivered a 15% annualized return to shareholders over the past five years. One of the main attractions to Annaly is that they were able to navigate the 2008 credit crisis with ease. With the steady dividend payout, these two mortgage REITs should be in any income-seeker's portfolio. What's more is that rates are at historically low levels and a possible hike in rates will mean higher yields for the companies; meanwhile a slowdown in refinancing activity will translate into slower prepayments (read more here).
These are five solid dividend stocks that we feel should be in the portfolio of any investor who's looking for income. We like to look to cash flow generating industries to find solid dividend-paying stocks. The tobacco industry and telecom business are both relatively high margin and stable, while the mortgage REIT segment has proved to be a great place to find high-yielding dividend payers.