By Matt Doiron
Interest rates on Treasuries have increased by nearly a full percentage point year to date, to above 2.6%, but are still moderately low in historical terms (they were around 4% in mid 2008, and around 3.5% in mid 2009). As a result there is still room for interest rates to rise, which would in turn increase the interest rates on corporate bonds and therefore the interest rate paid by companies with significant debt loads. For companies with high dividend yields, it is crucial to preserve cash flow in order to afford dividend payments and therefore income investors who worry about how a rise in rates might affect dividend stocks should be aware of prospective picks' debt burdens. Using data from Fidelity, here are five stocks which pay a dividend yield of at least 3.5% at current prices and which have a debt-to-equity ratio of less than 20%:
Philip Morris International (PM) leads our list as its market capitalization of $145 billion places its debt-to-equity ratio just below 20%. Cigarette stocks generally offer high yields, and while Philip Morris's yield is lower than many of its peers at 3.8% this is still high on an absolute basis. Because of weakness in the global economy- the company was formed from the breakup of Philip Morris to focus on international markets- revenue and earnings were down slightly last quarter compared to the second quarter of 2012.
Insider Monkey tracks quarterly 13F filings from hundreds of hedge funds and other notable investors. We have found through our research that the most popular small cap stocks among hedge funds outperform the S&P 500 by 18 percentage points per year on average (learn more about our small cap strategy). Our portfolio based on this strategy has earned an excess return of 33 percentage points in the last 11 months. We can also use this database to track interest in individual stocks and can see that Renaissance Technologies, founded by billionaire Jim Simons, owned 4.1 million shares of Philip Morris at the end of March (see Renaissance's stock picks).
Maxim Integrated Products (MXIM), an $8.3 billion market cap semiconductor company, also satisfies our criteria; in fact, Maxim has more cash on hand than its total debt. The company has generally increased its quarterly dividend payment over the last ten years, and currently pays an annual yield of 3.5%. Maxim's fiscal year ended in June; sales were about flat in its fiscal Q4 versus a year earlier, but net margins improved slightly resulting in an 8% increase in earnings. The stock is valued at 19 times trailing earnings.
Another tech company with less debt than cash- though both figures are low- is enterprise software company Compuware (CPWR). Compuware began paying dividends at a 4.3% annual rate in an effort to foil a planned takeover by billionaire Paul Singer's Elliott Management; however, the company continues to be mentioned as a prospect for financial or strategic investors and Elliott owned nearly 19 million shares at the end of Q1 (find Singer's favorite stocks). Some prospects for a buyout are already accounted for in the current price, going by the forward P/E of 19.
Also offering a high yield, though its business is quite risky, is GPS device provider Garmin (GRMN). Long term Garmin has little chance against native GPS and directions apps on smartphones, and last quarter its revenue was down 3% compared to the second quarter of 2012. 10% of the float is held short as of the most recent data. The stock continues to pay a dividend yield of 4.5%, but in the first six months of the year dividend payments accounted for all of cash flow from operations. There is $1.2 billion in cash on hand to absorb decreases in CFO at least in the short term.
Finally, Mercury General (MCY), an insurance company focused on providing auto insurance coverage, is another low-debt high-yield company. In fact, its quarterly dividend of 61.3 cents per share results in a yield of 5.5%, and Mercury General has a good record of increasing its dividend over time. It's also notable that the stock's beta is only 0.4. However, the stock has been bid up to a valuation of 23 times trailing earnings (and 1.3 times the book value of its equity) and the payout ratio is high. Still, income or defensive investors might want to learn more about the company.