15 High Dividend Stocks: Are These Yields Sustainable?

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 |  Includes: BMO, CM, CTL, FMCC, FNMA, GE, HCBK, MAT, MFA, NLY, NTLS, OKE, RPM, SPGI, SSL, T, WIN, WLTW
by: FXedu

By Hao Jin

One of the most popular ways for investors to select stocks is to focus on companies with long track records of increasing dividends. On Feb 27, 2009, General Electric (NYSE:GE), once the most prominent dividend aristocrat, cut its dividend 68%, the first time since 1938.

Who might be next?

I examined four types of high dividend stocks. Please note all these companies have great balance sheets, greater than 3.5% yield, low P/Es, and low short ratios.

1. High Beta Stocks

U.S. unemployment eventually surpassed 10%, consumer spending has scaled back, and more de-leveraging are all major economic headwinds. Consumer spending is likely to be soft for years. The weak labor market could undermine economic recovery.

“What we need most, though, are declining unemployment rates, especially in large, populous states, to give the consumer some buyer mojo.”

Until that happens, the decoupling of economic data from Wall Street's rally could give the stock market a bumpy ride ahead, or even a “W” shape.

I got rid of criteria 6 and 7 from last week’s article and came out with the following 8 high beta dividend stocks (sorted by beta):

Name

Symbol

P/E

PEG Ratio

Yield

Debt/CF

52-wk Range

Beta

CANADIAN IMP BK CM

(NYSE:CM)

3.7

1.1

5.20%

1.7

28.03 - 65.05

1.55

BANK OF MONTREAL

(NYSE:BMO)

17.1

1.4

5.20%

5.9

19.32 - 51.76

1.39

SASOL LTD ADR

(NYSE:SSL)

12.3

0.8

4.30%

0.5

19.16 - 41.74

1.39

RPM INTL INC

(NYSE:RPM)

19.3

1.1

4.30%

3.6

9.09 - 18.82

1.35

MCGRAW HILL COS THE

( MHP )

10.6

1.3

3.60%

0.9

17.15 - 34.10

1.16

Mattel, Inc.

(NASDAQ:MAT)

16.9

1.7

4.10%

1.7

10.36 - 19.19

1.12

WILLIS GROUP HOLDING

(WSH)

12.0

1.0

3.70%

6.6

18.52 - 33.17

1.06

ONEOK INC NEW

(NYSE:OKE)

12.7

2.0

4.60%

5.2

18.10 - 37.12

1.06

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The first four are very volatile: their betas exceed 1.35. I owned Bank of Montreal and Canadian Imperial Bank of Commerce for a long time. With such volatility and a payout ratio that exceeds 100%, I might consider to selling them when I adjust my allocation next time.

Sasol Ltd.is a South African integrated energy and chemical company. Look at its stock and dividend charts below. (Dividend charts includes Oct 2009’s dividend of $0.8).

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RPM's latest dividend increase came in October 2008, marking its 35th consecutive year of increased dividends. However, a CFO shakeup, unsolved litigation and concerns over the industry's prospects in this jobless-recovery economy make me wonder when it might cut its dividend.

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The bottom 4 seem ok to me so far, though Willis Group Holdings has too short a dividend history.

The McGraw-Hill Companies, Inc.: (Click to enlarge)

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2. No/Low Growth Stocks

Dividend growth is a great metric. Companies that raise their dividends are telling investors that the business, at least in the near future, will be stable.

There are 307 companies that have increased their dividends or earnings over at least 10 consecutive years, according to the Staton Institute’s 2009 edition of America's Finest Companies. Hindsight is always 20/20. However, nobody knows who the next GE will be.

I prefer PE/G instead. Dividend growth should be from earnings growth. Without earnings growth, companies that hang on to their high dividend too long for public relations reasons could end up suffering even more.

Windstream Corporation, (NASDAQ:WIN) a telecommunications services, has a 9.9% dividend yield. However, it doesn’t have growth data. Centurytel, Inc., (NYSE:CTL) another telecommunication company, has a payout ratio of 107%. Without growth, its 8.3% dividend yield is not sustainable.

Compared to those two, AT&T (NYSE:T) has a much better growth rate. Still, since its PEG >3, it didn’t make it on to my list last week.

3. REITs

Dividend coverage ratio is calculated as earnings per share divided by the dividend per share. It is a reverse payout ratio. If the ratio is under 1, the company is using its retained earnings, or even borrowing, to pay this year's dividend.

REITs usually carry a high amount of debt. For example, Annaly Capital Management (NYSE:NLY) has a whopping 15.2% dividend rate. It is the biggest player in “Mortgage Investment” industry, along with Fannie Mae (FNM) and Freddie Mac (FRE).

It is very interest rate-sensitive and volatile. I will not be surprised if it cuts its dividend in tough times ahead.

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4. Next Generation “Bellwether" Dividend Stocks?

I use the following criteria to try to find mid-cap stocks with solid dividend growth:

Yield>3.5%; Market cap between $500M and $2B; PE/G<1; Short Ratio<5.

Below are 3:

Name

Symbol

P/E

PEG Ratio

Yield

NTELOS Holdings Corp.

(NASDAQ:NTLS)

13.2

0.98

5.9%

Hudson City Bancorp.

(NASDAQ:HCBK)

12.7

0.94

4.6%

MFA FINANCIAL INC.

(NYSE:MFA)

8.0

0.27

12.6%

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NTELOS Holdings Corp. has too short a dividend history. It is too early to tell what will be. Hudson City Bancorp and MFA have huge debt loads, similar to other REITs.

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Disclosure: I have a long position in BMO and CM. All data is from Yahoo Finance as of Oct 2, 2009.

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