By Matt Doiron
Income investors should begin their investment process by looking for stocks with attractive dividend yields, but should be sure to consider other factors such as the fundamentals of the company (including whether or not its valuation makes sense) and, of course, how sustainable its dividend payments are. The dividend payout ratio divides a company's dividend payment by its net income; a low ratio, therefore, indicates that chances are a company can afford its current dividends and maybe even an increase at its current level of earnings. Using data from Fidelity, here are five stocks which pay dividend yields of 4% or higher and which have a dividend payout ratio of less than 60%:
Oil major ConocoPhillips (COP) actually just increased its quarterly dividend to 69 cents per share, making for an annual yield of 4.2%. The company still has a fairly low payout ratio, though in this case investors should be aware that business has been struggling: ConocoPhillips's revenue fell 4% in the first quarter of 2013 versus a year earlier, and net income fell at a higher rate. Wall Street analysts believe further declines are limited and so the forward P/E is 11. At Insider Monkey, we track quarterly 13F filings from hundreds of hedge funds and other notable investors as part of our work researching investment strategies (for example, we have discovered that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year). We can see from our database that Warren Buffett's Berkshire Hathaway owned over 24 million shares at the end of the first quarter of 2013 (find Buffett's favorite stocks).
Another basic materials stock meeting our criteria is Freeport-McMoRan Copper & Gold (FCX). This stock is down considerably since management announced the acquisition of two oil and gas companies, which markets saw as reducing the company's focus (as well as potentially occurring at too high a price). Still at least for now there is a good dividend yield (of 4.4%) and a low payout ratio, though as might be expected of a copper produce Freeport-McMoRan is dependent on the global economy with a beta of 2.4. Billionaire John Paulson's Paulson & Co reported a position of 9 million shares as of the end of March (see Paulson's stock picks).
PPL (PPL), a utility which supplies electricity primarily in Kentucky, Pennsylvania, and the U.K., increased its quarterly dividend to 36.7 cents per share at the beginning of this year, giving the stock an annual yield of 4.7%. Of course, as with many utilities PPL offers the advantage of little exposure to broader market conditions with a beta of 0.2. We would warn that while the payout ratio is low based on current earnings, recent reports have shown a decline in net income from their levels a year ago and analysts are forecasting a small decline in earnings per share next year.
Also offering a dividend yield of more than 4% at current prices and dividend levels is Public Service Enterprise Group (PEG), an American utility distributing electricity and natural gas. There is a beta of 0.2 here as well, and as with PPL net income has recently been high enough that the dividend should be safe for at least the short term (it was most recently increased in the first quarter of this year). Again, however, income investors may want to more fully investigate the business's recent financial performance as profits have been down.
Rounding out our list is Darden Restaurants (DRI), an owner of table-service restaurant brands such as Red Lobster and Olive Garden. With consumer preferences shifting to quick service restaurants amidst the company's expansion, Darden saw a 12% decline in net income in the fourth quarter of its most recent fiscal year (which ended in April) versus a year earlier even though sales were up. The stock is flat over the last year, and with Darden increasing its dividend by 10% over that period the dividend yield is now 4.4%. The payout ratio is about 60%, and Darden's forward earnings multiple is 15.