By Eli Inkrot
We wanted to get under-the-hood of some blue chips and examine the safety of their dividends and their growth prospects moving forward. Here are 7 stocks we uncovered that offer safe yields for a retirement portfolio.
If you’re in to above average yields, double digit dividend growth rates and a strong history of making payouts consider Altria (MO). This tobacco manufacture has not only paid but also increased dividend payments for 42 straight years and has a current yield of 5.8%. Many refuse to hold this smoking giant due to its ‘sinful’ business and after all a bad reputation and price add-ons, or “sin taxes”, can’t be good for business.
But then again, with over a billion smokers consistently providing their inelastic demand MO does have significant pricing power. The 81% payout ratio is approaching worrisome, but the 5 year average dividend growth rate nearing 15% and strong payout history are promising. If Altria can keep the same growth rate for the next five years your yield on cost would double to over 11%; and that’s before any price appreciation. Looks like a medium term buy opportunity.
If you bought Johnson & Johnson (JNJ) on Monday, you’ve already seen a 7% appreciation on the heels of increased earnings. This $160 Billion healthcare company has consistently increased dividends for an impressive 48 straight years. The 3.4% current yield is above average and another dividend increase might be on its way very soon. Here’s why JNJ might make you rich: the 45% payout ratio and strong history suggest dividends will continue to grow. Given the near 11% average 5 year growth rate, JNJ’s 3.4% current yield could turn into a 10% yield on cost in just 10 years. Just imagine you’re payouts doubling every 7 years.
Abbott Laboratories (ABT): This Illinois based drug manufacture has increased dividend payouts for 39 straight years and has a current yield of 3.7%. The 65% payout ratio is in line and the dividend growth rate has been quite stable hovering around 10% for the 1, 3, 5 and 10 year averages. Further ABT has slightly increased its dividend payout growth rates as of late. If Abbott can keep it up for the next 10 years it’ll come in with a yield on cost just under 10%; do it for 20 years and it’ll be closer to 25%. Buy now and 20 years later you could be looking at substantial returns.
“Innovation would be stifled” according to Sprint CEO Dan Hesse, if AT&T (T) was allowed to acquire T-Mobile. Is it true? Time will tell. Does AT&T have a strong dividend history? Yes it does. This No. 2 telecommunications firm has increased dividend payments for the last 27 years and has a current yield of 5.6%. True that yield was above 6% just a month ago, but it’s still well above average. T has a payout ratio of 51% and looks poised to stay in the business of paying shareholders.
The average dividend growth rates don’t inspire much awe, hovering around 5%. At that pace it would take a little over 14 years for the current 5.6% yield to double to 11.2% (Thanks rule of 72!). AT&T’s current yield might be appealing for the short term, but its low dividend growth rate exposes the power of compounding growth in other stocks; a buy for short term income, not so much for long term prospects.
Verizon (VZ) doesn’t have the lengthy history of T, having increased its dividend payouts for just 6 straight years. The current yield of 5.2% is well above average, but has only been growing at just under 4% for the last 5 years. A quick check of the clearly unsustainable 213% payout ratio and investors should show great caution. Although to be fair it had been in line in the past. With the averages, it would take VZ about 5 more years than T to reach the same 11.2% yield and, as discussed, AT&T wasn’t overly impressive.
On a dividend level T looks like a better option if you’re choosing between the two, but those looking for big time yield on cost in the future might want to avoid these current high yield “traps”.
With that in mind let’s move to the lowest yielding stock on the list so far. McDonald’s (MCD). Ok, so with a 3.2% current yield it isn’t exactly below average, but it does show the opportunity for growth quite well. In 2000 the current yield was just 0.7% and has since moved to the 3.2%, but the yield on cost has increased to 7.6% during that same period. That’s the power of growing dividends and time.
MCD has been making monumental upgrades in its dividend payouts with a 10 year average dividend growth rate close to 27%. It has slowed to the low double digits as of late, but with the 53% payout ratio there’s plenty of room for future increases. Using a modest 10% dividend growth rate the yield on cost would double within 8 years. Or given a more optimistic 15% or 20% rate, yield on cost could hit double digits in that same 8 year span. Either way a reasonable yield and strong growth opportunities should prove to be a promising buy opportunity for investors.
Let’s take it down another notch in the current yield department. Exxon Mobil (XOM) has a current yield of 2% and has been increasing payments for 28 straight years. Just 10 months ago the current yield was closer to 3%, as a recent price appreciation has lowered yields. Add in that another increase should be coming this May along with the 28% payout ratio and you’re starting to paint the picture for income investors. The 5 year average dividend growth rate is close to 9%, although recently it has a slowed.
Growing at 9%, it would take 8 years for the yield on cost to double and 13 years to triple. Another solid buy if you’re looking for a mix of dividend growth and price appreciation.
If you’re looking for stocks to provide long term dividend income wealth, it’s important that the company both pays dividends and increases them. It can be difficult to predict future payouts and easy to chase high yields. It’s important to realize the potential of strong dividend growth rates, but that’s not to say that current yield isn’t important. Here’s to double digit yield on costs!
Disclosure: I am long T.