Amidst an economic backdrop where the 30-year U.S. treasury bond rates are around 3% and the Fed plans to keep target interest rates at historical lows through 2015, it's not a bad time to take a look at some solid dividend stocks that offer yields in excess of treasuries. All five stocks below have well-covered dividends, with earnings payouts of less than 50%, happen to be high yielding dividend payers, with the average dividend yield for the five in excess of 5%.
Specifically, for the five stocks below, the average dividend yield is 5.2%. What's more, is that an equally weighted portfolio of the five stocks below, irrespective of their dividend, would have outpaced the S&P 500 by 8.8% over the last 12 months, generating an alpha of 3%.
- Royal Dutch Shell PLC (NYSE:RDS.A) has a dividend yield of 5.2%, with a payout of only 25%. The company is also one of the largest integrated energy companies in the world, being one of the six supermajors.
Royal Dutch has been transitioning to a focus on upstream exploration and production business, which tends to be more profitable than downstream operations. Royal expects worldwide production to increase some 25% by 2018, some of the most robust production growth expectations among all supermajors. The company is also currently assessing 60 new projects, which is forecasted to guarantee upstream growth to at least 2020.
Royal Dutch Shell also happens to be the world's second-largest natural gas producer, a market we are bullish on. Royal Dutch has size, asset diversification and technical strength that make it a solid investment.
- TOTAL SA (NYSE:TOT) pays a 6% dividend yield, on a payout of 55% of earnings. The company is another supermajor, just like Royal Dutch. This France-based oil and gas company has the lowest exposure of all the supermajors to the North American regions, and its upstream assets have exhibited lower natural decline rates and longer productive lives.
Its better-than-average asset portfolio gives Total a significant competitive advantage. As well, the oil and gas company is still looking to expand its portfolio; during late 2012 the company acquired exploration licenses in Iraq, Bulgaria, Mozambique, Philippines, Indonesia, Myanmar, made a new discovery in North Sea and launched a development phase in Venezuela and Italy, which all helped the company achieve a reserve replacement ratio in excess of 100% in 2012 (read more on why Total is industry-best).
- Valassis Communications, Inc. (NYSE:VCI) has a dividend yield of 4.3% and its dividend coverage is 2.3 (anything above 2.0 is positive). Valassis also has very positive long-term expected EPS growth rate of 26%. The company offers a wide range of marketing services to consumer packaged goods manufacturers, retailers and technology companies.
Its sustainable competitive advantage includes the fact that it is the only company that provides a combination of home-delivered media products and services at the market, neighborhood and household targeted levels and can integrate all three levels of targeting into a single solution.
The return on equity is impressive at 28% and the future appears bright, with analysts expecting the company to grow EPS at 26% annually over the next five years. Valassis been improving its balance sheet of late, lowering its debt, with a current debt to capital ratio of 50%, versus its five-year average of 75%.
- TAL International Group, Inc. (NYSE:TAL) pays a 6% dividend yield on a 56% payout ratio. The story gets better, where its five-year historical dividend growth rate is 11% and the company has a 5-year expected annual EPS growth of 27%. TAL is a lessor of intermodal containers and chassis.
Basically the company's operations includes the acquisition, leasing and subsequent sale of multiple types of intermodal containers. TAL has solid return metrics, with a net margin of 22%, versus the industry average of 10%, and a return on equity of 22%, compared to an industry average of 14% (read about other high yielding shipping-realted picks).
- Digital Realty Trust, Inc. (NYSE:DLR), a REIT in the data storage space, has a 4.6% dividend yield, and has grown its dividend payment by an average of 20% annually for the last five years. Digital Realty also has an impressive future, with analysts expecting EPS to grow at 14% over the next five years.
Digital Realty owns and manages technology-related real estate. Its properties contain applications and operations critical to the day-to-day operations of technology industry tenants, including managing the highly popular data centers. Digital Realty operates nearly 100 data centers and is a top data center provider. Billionaire Ken Fisher, founder of the $42 billion hedge fund Citadel Advisors, added Digital to his portfolio last quarter (see all of Fisher's big moves).
Demand for data centers is expected to be robust going forward, thanks to general move toward cloud computing by businesses. Gartner believes that 10% of all IT capabilities will be delivered via the cloud by 2015 (read more about top REIT niches).
The uniqueness about the five stocks above is that they are not as well known as some of the well covered dividend stocks. We like this, as it allows for potential mis-pricing and undervaluing of the stock. The two oil/gas supermajors Royal Dutch and Total pay some of the highest-solid dividends around, yielding 5.2% and 5.9%, respectively. TAL is the highest yielder, at 6%, and while Digital Realty and Valassis pay a dividend yield sub 5% they offer investors impressive price appreciation opportunities.