15 High Dividend Stocks: Are These Yields Sustainable?

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 (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	(CM)	3.7	1.1	5.20%	1.7	28.03 - 65.05	1.55
BANK OF MONTREAL	(BMO)	17.1	1.4	5.20%	5.9	19.32 - 51.76	1.39
SASOL LTD ADR	(SSL)	12.3	0.8	4.30%	0.5	19.16 - 41.74	1.39
RPM INTL INC	(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.	(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	(OKE)	12.7	2.0	4.60%	5.2	18.10 - 37.12	1.06

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).

(Click to enlarge)

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.

(Click to enlarge)

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)

(Click to enlarge)

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, (WIN) a telecommunications services, has a 9.9% dividend yield. However, it doesn’t have growth data. Centurytel, Inc., (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 (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 (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.

(Click to enlarge)

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.	(NTLS)	13.2	0.98	5.9%
Hudson City Bancorp.	(HCBK)	12.7	0.94	4.6%
MFA FINANCIAL INC.	(MFA)	8.0	0.27	12.6%

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.

(Click to enlarge)

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

Original article

Comments

[Self Direct...:]

You wrote, "REITs usually carry a high amount of debt. For example, Annaly Capital Management (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."

I think your readers might be confused by the above if they think NLY's business model is similar to FNM and FRE. NLY does not guarantee mortgages. Also, tough times (a slow economy) are generally bullish for AmREITs like NLY. Here are links to a couple of articles to help clear things up.

tinyurl.com/lz6kj2

tinyurl.com/nnzlll

Thanks.

Oct 07 09:02 AM

[User 107639:]

Wow... you put HCBK and MFA in the same sentence implying that these are in similar businesses? Your comments on NLY clearly demonstrate you don't understand their business model.

Oct 07 09:45 AM

[mbkelly75:]

You might keep in mind that when a solid company (GE is a good example) cuts it's dividend - it can be a wonderful time to buy it right after it takes the almost guaranteed price drop in it's share price. GE dropped hugely - and their only reason for the drop was to maintain the company's good health. I bought it around $6 (with even it's lowered dividend around 9%) and sold enough of the shares to pay all my costs and expenses around $12 and ended up with the shares left over being zero cost-basis (free) shares. They will not be in my core portfolio again until they have had 5+ years of raising that dividend again - but I still have a great stock paying an outstanding dividend in my exploration portfolio no matter what happens from here.

Oct 07 10:32 AM

[stink726:]

mbkelly75 - I'm confused over the concept of having zero cost basis; maybe you can help me understand it. As an example, if I'd bought 1000 shares of GE at $6.00 and sold 500 at $12.00, I would have reported a sale of $6000 on my tax form with a basis [500 shs times $6.00] of $3000. The remaining shares still have a basis of $6.00 per share, don't they?


On Oct 07 10:32 AM mbkelly75 wrote:

> You might keep in mind that when a solid company (GE is a good example)
> cuts it's dividend - it can be a wonderful time to buy it right after
> it takes the almost guaranteed price drop in it's share price. GE
> dropped hugely - and their only reason for the drop was to maintain
> the company's good health. I bought it around $6 (with even it's
> lowered dividend around 9%) and sold enough of the shares to pay
> all my costs and expenses around $12 and ended up with the shares
> left over being zero cost-basis (free) shares. They will not be in
> my core portfolio again until they have had 5+ years of raising that
> dividend again - but I still have a great stock paying an outstanding
> dividend in my exploration portfolio no matter what happens from
> here.

Oct 07 03:20 PM

[otctrader:]

yes
but in actual $$
1000 x 6 = 6000
500 x 12 = 6000
so the remaining 500 are free...
that is you have no money invested ..
now the tax situation is different
if you had a tax loss carryforward you could pay no taxes on the sale of the 500
if you still have a tax loss carryforward when you sell the remaining 500
you may not pay any taxes
or
if you put the remaining 500 shares up as collateral, borrow money, reinvest
and live happily ever after :)
maybe


On Oct 07 03:20 PM stink726 wrote:

> mbkelly75 - I'm confused over the concept of having zero cost basis;
> maybe you can help me understand it. As an example, if I'd bought
> 1000 shares of GE at $6.00 and sold 500 at $12.00, I would have reported
> a sale of $6000 on my tax form with a basis [500 shs times $6.00]
> of $3000. The remaining shares still have a basis of $6.00 per share,
> don't they?

Oct 08 02:47 AM

[Erichz:]

I also agree that your description of NLY is flawed. In an environment like today their business model is what allows them to sustain the high dividend. Having invested in them in the past, this is a well run company and they know how to manage the dividend. I would only expect to see their dividend only come down if the spread between their borrowing rate and mortgage rates tightens. The likely hood of that happening soon is small.

Oct 08 05:16 PM

[stink726:]

otctrader - Thanks for the info and explanation.

Oct 09 12:17 PM

[Whatmakesme...:]

"Hudson City Bancorp and MFA have huge debt loads, similar to other REITs."

HCBK is a bank not a REIT. Why is this person writing articles on investment?

Oct 13 02:26 AM