Income-oriented investors have yet another reason to be upset with the bond markets. Junk bond yields fell to a record low a few days ago and are staying near those levels. As of Wednesday evening, the Barclays U.S. Corporate High Yield index yielded a mere 6.68%, which isn't much when you consider the risk of default.
These low yields are just one sign of the bond market's cheery mood. Corporations are finding plenty of buyers for their debt, and many offerings have been completed this week. Among the investment-grade companies selling bonds are Google (GOOG), Norfolk Southern (NSC) and Walt Disney (DIS). Included in this week's near-record level of junk bond offerings is beleaguered Chrysler, which is refinancing its loan package.
Taking advantage of the low interest rates is good for a company's bottom line, though it does raise bondholders' ire.
Eventually, these low interest rates will give way to higher ones. Even some members of the Federal Open Market Committee suggested that inflation risks may require monetary tightening sooner rather than later, according the Fed minutes released on Wednesday. Nevertheless, I continue to think that bonds do play a role in an individual investor's portfolio, particularly because they provide a return of capital, offer a regular stream of income and have historically been uncorrelated to stocks. (Low correlations provide diversification benefits.)
This does not change the simple fact that some of you still want more income out of your portfolios. So, I decided to take a look at stock yields to see what you could get. Specifically, I screened the S&P Composite 1500 and found more than 800 stocks that have paid a dividend for at least three years. The average yield of these stocks was 2.25%. (The S&P Composite 1500 is composed of the S&P 500, the S&P MidCap 400 and the S&P SmallCap 600).
There are 50 members of the S&P Composite 1500 that currently yield 5% or more. Though the allure of higher income may sound nice, keep in mind that more than half of these companies are either REITs (18), electric utilities (9) or telecoms (7). In other words, the highest yielding companies are from a small group of industries. The higher income comes at the cost of diversification.
Then there is the issue of performance. The income generated by these 50 companies has not been large enough to offset the comparatively weak price performance. The average 52-week price gain for these stocks is 5.1%, whereas the iShares S&P 1500 Index Fund (ISI) has appreciated by 18.5%. Even once the dividends are factored in, the total return for the ETF is higher.
The concentration of industries and the lackluster price performance show that there is not a free lunch. Anything you do in terms of investing comes with a trade-off. When it comes to portfolio yield, you are currently faced with choosing between lower income, potentially falling prices for bonds or--in the case of higher-yielding stocks--a more concentrated portfolio. None of this is ideal.
Keep in mind that with taxes on dividends and long-term capital gains currently the same, you should be somewhat indifferent as to how you realize income from stocks. Withdrawing dividends or proceeds from the sale of shares both equate to money pulled from your portfolio. The only difference is transaction costs, which, with an online broker, can be very small.
Since I realize you would want to see the list, here are the 50 stocks that yield 5% or more.
|S&P Composite 1500 Stocks Yielding 5% or More|
|Company||Ticker||Price||Industry||Yield||52-wk Price Chg|
|AT&T Inc.||T||$31.41||Communications Services||5.5%||22.0%|
|CenturyLink, Inc.||CTL||$42.42||Communications Services||6.8%||24.0%|
|Frontier Communications Corp||FTR||$8.66||Communications Services||8.7%||9.0%|
|NTELOS Holdings Corp.||NTLS||$19.51||Communications Services||5.7%||4.0%|
|USA Mobility, Inc.||USMO||$15.69||Communications Services||6.4%||5.0%|
|Verizon Communications Inc.||VZ||$37.26||Communications Services||5.2%||39.0%|
|Windstream Corporation||WIN||$13.30||Communications Services||7.5%||23.0%|
|Ameren Corporation||AEE||$29.69||Electric Utilities||5.2%||17.0%|
|Duke Energy Corporation||DUK||$19.22||Electric Utilities||5.1%||14.0%|
|Exelon Corporation||EXC||$41.74||Electric Utilities||5.0%||-1.0%|
|FirstEnergy Corp.||FE||$42.53||Electric Utilities||5.2%||16.0%|
|Integrys Energy Group, Inc.||TEG||$53.89||Electric Utilities||5.0%||10.0%|
|Pepco Holdings, Inc.||POM||$20.04||Electric Utilities||5.4%||19.0%|
|PPL Corporation||PPL||$27.93||Electric Utilities||5.0%||9.0%|
|Progress Energy, Inc.||PGN||$48.39||Electric Utilities||5.1%||20.0%|
|UIL Holdings Corporation||UIL||$33.99||Electric Utilities||5.1%||14.0%|
|Cincinnati Financial Corporati||CINF||$30.91||Insurance (Property & Casualty)||5.2%||12.0%|
|Mercury General Corporation||MCY||$40.87||Insurance (Property & Casualty)||5.9%||-9.0%|
|Old Republic International Cor||ORI||$12.47||Insurance (Property & Casualty)||5.6%||-11.0%|
|Eli Lilly & Co.||LLY||$38.95||Major Drugs||5.0%||13.0%|
|Apollo Investment Corp.||AINV||$11.27||Misc. Financial Services||9.9%||-4.0%|
|Prospect Capital Corporation||PSEC||$11.81||Misc. Financial Services||10.2%||9.0%|
|Pitney Bowes Inc.||PBI||$24.58||Office Equipment||6.0%||3.0%|
|Standard Register Company, The||SR||$3.37||Office Supplies||5.9%||-27.0%|
|R.R. Donnelley & Sons Company||RRD||$20.32||Printing Services||5.1%||1.0%|
|Cedar Shopping Centers Inc||CDR||$5.50||Real Estate Operations||6.5%||-28.0%|
|Entertainment Properties Trust||EPR||$47.31||Real Estate Operations||5.9%||7.0%|
|Franklin Street Properties Cor||FSP||$13.44||Real Estate Operations||5.7%||3.0%|
|Getty Realty Corp.||GTY||$24.53||Real Estate Operations||7.8%||9.0%|
|HCP, Inc.||HCP||$36.80||Real Estate Operations||5.2%||10.0%|
|Health Care REIT, Inc.||HCN||$50.65||Real Estate Operations||5.6%||19.0%|
|Healthcare Realty Trust Incorp||HR||$21.81||Real Estate Operations||5.5%||-13.0%|
|Inland Real Estate Corporation||IRC||$8.84||Real Estate Operations||6.4%||-3.0%|
|Liberty Property Trust||LRY||$34.90||Real Estate Operations||5.4%||5.0%|
|LTC Properties, Inc.||LTC||$28.60||Real Estate Operations||5.9%||5.0%|
|Mack-Cali Realty Corp.||CLI||$34.27||Real Estate Operations||5.3%||-2.0%|
|Medical Properties Trust, Inc.||MPW||$11.67||Real Estate Operations||6.9%||18.0%|
|National Retail Properties, In||NNN||$25.85||Real Estate Operations||5.9%||13.0%|
|Omega Healthcare Investors, In||OHI||$21.19||Real Estate Operations||7.2%||6.0%|
|Potlatch Corporation||PCH||$37.07||Real Estate Operations||5.5%||0.0%|
|Senior Housing Properties Trus||SNH||$23.42||Real Estate Operations||6.3%||6.0%|
|Universal Health Realty Income||UHT||$42.67||Real Estate Operations||5.7%||25.0%|
|Urstadt Biddle Properties Inc.||UBA||$18.64||Real Estate Operations||5.3%||6.0%|
|Valley National Bancorp||VLY||$13.51||Regional Banks||5.1%||-10.0%|
|United Online, Inc.||UNTD||$6.11||Retail (Specialty Non-Apparel)||6.5%||-16.0%|
|New York Community Bancorp, In||NYB||$16.26||S&Ls/Savings Banks||6.2%||0.0%|
|Wilshire Bancorp, Inc.||WIBC||$3.20||S&Ls/Savings Banks||6.3%||-71.0%|
|Altria Group, Inc.||MO||$27.31||Tobacco||5.6%||26.0%|
|Reynolds American, Inc.||RAI||$38.69||Tobacco||5.5%||44.0%|
|Overseas Shipholding Group Inc||OSG||$29.43||Water Transportation||5.9%||-33.0%|
|Data as of 5/13/2011.|
How I Made the Screen
I created a very basic screen on the AAII Stock Investor Pro program to identify the stocks within the S&P 1500 that pay a dividend. The specific criteria I used were as follows:
Standard and Poor Stock Not Equal “None”
- Yield > 0
- Yield-Average Y1 > 0
- Yield-Average Y2 > 0
- Yield-Average Y3 > 0
As you can see, my primary intent was to filter out any stock that was not in the S&P Composite 1500 and did not pay a dividend during each of the past three years. I further excluded any company that is not indicated to pay a dividend over the forthcoming four quarters. The downside of this screen is that it does not consider other relevant factors such as valuation, financial strength or earnings growth. Thus, this screen--and the list of stocks above--is merely a starting point for additional research.
This Week's Gratis Tip
Choosing between stocks and bonds is just one aspect of portfolio management. Managing taxes is another. When I speak to groups of investors, I encourage them to coordinate their various accounts, both taxable and tax-deferred (e.g., an IRA), to cut their tax bill. Picking the Right Tax Pocket for Your Assets provides a good primer on how a little extra effort can help you hold onto more of your savings.
The Week Ahead
Approximately 15 S&P 500 member companies are scheduled to report earnings next week. Included in this group are Medtronic (MDT) on Tuesday, Costco (COST) and National Oilwell (NOV) on Wednesday and H.J. Heinz (HNZ) on Thursday.
The week's first economic report of note will be April new home sales, scheduled for release on Tuesday. Wednesday will feature April durable goods orders. The first revision to first-quarter GDP will be published on Thursday. Friday will feature the final May University of Michigan consumer confidence survey, April personal income and spending, and April pending home sales.
St. Louis Federal Reserve Bank President James Bullard has public appearances scheduled for Monday and Tuesday. Kansas City Federal Reserve Bank President Thomas Hoenig will speak on Tuesday and Minneapolis Federal Reserve Bank President Narayana Kocherlakota will speak on Wednesday.
The Treasury Department will auction $35 billion of two-year notes on Tuesday, $35 billion of five-year notes on Wednesday and $29 billion of seven-year notes on Thursday.