By Matt Doiron
Stocks with high-dividend yields are appealing, as they in theory allow investors to earn a decent return without having to rely on market conditions, but with any dividend stock one should at least consider the potential for the dividend to be cut as a result of the company's cash needs. One quantitative metric that is relevant in this area is the dividend payout ratio, which is calculated by dividing dividend payments by net income. Low dividend payout ratios suggest that (at least for the time being) the company has enough earnings to continue paying dividends at current levels if it so chooses. Using data from Fidelity, here are five stocks that pay dividend yields of 5% or higher at current prices and dividend levels, and have a dividend payout ratio of less than 80%:
Leading our list is Reynolds American (RAI), a $26 billion market cap cigarette company, which barely meets our dividend criterion with a yield of 5%. Cigarette companies are cash cows, making high yields very common particularly in those businesses focused on more mature markets. The dividend payout ratio is a little over 60%, so dividends do not overtax the operating business, and the stock's beta is low as well giving it some potential as a defensive stock. Renaissance Technologies, founded by billionaire Jim Simons, cut its stake in Reynolds American by 38% in the fourth quarter of 2012 but still owned 1.3 million shares (find Renaissance's favorite stocks).
Another cigarette company meeting our criteria is Lorillard (LO). Its metrics look very similar to Reynolds American's: a dividend yield of about 5%, a dividend payout ratio of 64%, and even a beta of 0.4. As such we would consider it another good pick for an income or a defensive portfolio, as the dividend looks fairly safe. Lorillard is also a possible value play, trading at 14 times trailing earnings with revenue up slightly in the first quarter of 2013 versus a year earlier. First Eagle Investment Management reported owning 2.7 million shares of Lorillard at the beginning of this year (check out First Eagle's stock picks).
Mail and document equipment and services company Pitney Bowes (PBI) currently makes quarterly payments of 37.5 cents per share, which makes for a very high dividend yield at the current stock price of under $17. The payout ratio is below 80%, though not by much and in this case it's wise to be aware of the fact that net income dropped by 57% in the company's last quarterly report compared with the fourth quarter of 2011. That line of business certainly doesn't seem too attractive, though of course the yield is high enough that Pitney Bowes could still look interesting even after a dividend cut.
KKR Financial Holdings (KFN) invests in assets such as high-yield debt securities and oil and gas royalty interests, and the risk of these investments leaves investors with an 8% dividend yield at current prices. Going by the most recent financial results, the payout ratio is about 50% though we'd consider KKR Financial's business to be considerably more risky than (for example) manufacturing cigarettes and so would be quite cautious when evaluating the company. Billionaire Leon Cooperman's Omega Advisors had KKR Financial as one of its 10 largest holdings by market value in its most recent 13F filing (see more stocks Cooperman likes).
Rounding out our list of high-yield stocks with low payout ratios is PDL BioPharma (PDLI), a $1.1 billion market cap company, which owns a portfolio of intellectual property assets related to humanized antibodies. Quarterly payments of 15 cents per share result in a good dividend yield, and Fidelity's data indicates that less than half of earnings is being paid out in dividends. However, PDL BioPharma has a substantial bearish community as 18% of the float is held short, and so investors should look into why so many market players are negative on the company before considering an investment.