By Matt Doiron
Income investors certainly have the option of a number of high-yield stocks in the current market, including some which currently pay yields of over 10%, but in many cases these stocks are risky and their dividend payments may not be sustainable over the long term. While there's nothing wrong with having a small portion of one's portfolio dedicated to these names, we generally think - particularly if an investor wants a lower-maintenance portfolio - the core of a dividend portfolio should be more stable companies even if this comes at a cost of somewhat lower yields. Here are five stocks, while not necessarily good short-term picks, that yield over 4% and which we think should be able to maintain high dividend payments over the long term:
While a number of companies in the cigarette industry pay high yields, we think that income investors should start by looking at Lorillard (LO). A recent boost in quarterly dividend payments leaves a yield of 5%, and the company has in fact been experiencing growth on both top and bottom lines. For what it's worth, the trailing P/E of 14 is also low compared to the rest of the cigarette industry. In addition to making Lorillard more interesting from a value perspective, this information combined with the high yield implies that the company currently has a lower dividend payout ratio than its peers. Renaissance Technologies, founded by billionaire Jim Simons, reported a position of 4.5 million shares as of the end of March (see Renaissance's stock picks).
AT&T (T) is another of our long-term dividend picks, with a yield of close to 5%. Revenue and earnings were essentially unchanged in its most recent quarter compared to the same period in the previous year; we certainly don't expect high growth from a telecom, but the flip side to this is that business should be stable in the long term. AT&T features a low beta, of 0.4, and analyst consensus forecasts for 2014 imply a forward earnings multiple in the low teens suggesting that the current stock price is likely not overvalued by much if at all. Fisher Asset Management disclosed ownership of over 7 million shares in its most recent 13F; that fund is managed by billionaire Ken Fisher (find Fisher's favorite stocks).
We'd also recommend Southern (SO) as a long term income stock pick, though it's quite difficult to differentiate between many large cap utilities. Southern, which is focused on Florida, Georgia, Alabama, and Mississippi, has increased its dividend payments over the long term with the most recent increase (to a quarterly payment of 50.7 cents per share) making for a yield of 4.5%. Certainly an electric utility with a market capitalization of close to $40 billion is quite stable, and we have few long-term concerns about the company. Like telecoms and cigarette companies, utilities also have the benefit of little correlation with broader market indices as shown in this particular case by Southern's beta of 0.1.
Over the short term, cuts in federal military spending are a concern for Lockheed Martin (LMT)'s business. However, the aerospace and defense business isn't going away any time soon and for investors who are more focused on dividends the stock's current yield of 4.3%- easily the highest among large-cap peers- should be of interest. While the concentration on government customers renders defense contractors vulnerable to spending cuts, it also protects them from many macro factors. Lockheed Martin's trailing and forward earnings multiples both come in at 12, so the valuation is at least close to value territory as well. Billionaire Ken Griffin's Citadel Investment Group nearly doubled its holdings of Lockheed Martin during Q1, to a total of 2.3 million shares (check out more stocks Griffin was buying).
Freeport-McMoRan Copper & Gold (FCX) barely squeaks over the 4% threshold, but given its long history of increasing dividends over time (though payments have been volatile) and our skepticism that natural resources such as copper would see a dramatic fall in price going forward we think that it is a potential income pick. We're not wild about the company's recent decision to buy two oil and gas companies, thus potentially weakening its focus, but the stock price has fallen 20% in the last six months and it's possible that this has been an overreaction, creating a long-term buying opportunity. The stock's beta is 2.2, so its price does tend to fluctuate in response to broader economic conditions unlike the other stocks on this list.