by Stephen Zhu
Dividend stocks are favorites of famed value investors like Warren Buffett and George Soros, and for good reason. Dividends are paid out by companies who earn excess cash and can create the most value by returning these earnings to investors, rather than by funding internal projects. When a firm can safely put out a high yield dividend every quarter, the stock is a solid return-generating investment choice for any portfolio. Investment Underground looked at 10 stocks paying out high dividends, and here’s what we found:
AT&T (T): This telecom giant is well known to consumers for providing cellular phone service, landline telephony, cable television, and wired internet. Over the past year, AT&T paid out $1.72 in dividends per share for an incredible 5.67% yield. The great news is that the company still generated $3.51 in EPS and has $5.99 in cash flow per share, more than enough to cover the dividend and ensure stability. Going forward, the dividend is expected to grow at a respectable 5.39% annually over the next five years, so the stock will still be paying a great return for at least a few more years.
AT&T has been making headlines recently with a proposed acquisition of the T-Mobile USA division from its German owner, Deutsche Telekom. Several technology firms such as Microsoft (MSFT) and Yahoo (YHOO) have voiced support for the deal, while cell phone service competitor Sprint Nextel (S) and consumer advocacy groups have opposed. The FCC and FTC will take a while to come to a decision, but in the meantime, AT&T’s growth prospects look positive regardless, with a healthy 9.1% increase in earnings expected next quarter and a 7.6% increase next year.
Even before the proposed deal, a quick valuation of AT&T indicates that the dividend alone makes the stock worth much more than its asking price. If the acquisition fails to complete, AT&T will have saved the costs of integrating T-Mobile’s infrastructure, employees and customers. If the acquisition is successful, AT&T will be poised for much higher growth through access to more customer markets and capital for new infrastructure, like a 4G LTE network.
Verizon Communications (VZ): Verizon is one of the main competitors to AT&T in landline multimedia services, as well as the largest competitor in the cell phone service market. The stock’s $1.95 in dividends this year made for an impressive 5.54% return on equity. One worry is that the dividend paid was greater than the EPS of $1.25, so that the dividend won’t be sustainable. However, the company has plenty of cash flow to cover the dividend. Further, over the next five years, earnings are projected to grow at 8.62% per year-- more than twice the 3.51% rate of dividend growth.
Verizon has been ahead of the game in several emerging markets throughout the U.S. Its wireless phone division-- which has the largest number of subscribers-- has already started implementing a 4G LTE network, and now also sells the Apple (AAPL) iPhone which used to be exclusive to AT&T in the U.S. Verizon FiOS, offering fiber optic television, internet and telephone service in homes, is also highly successful and expanding rapidly. Accounting for all this potential, VZ has an attractive forward P/E ratio of 13.48 and a PE/G of 1.86, better than the industry average. That means this stock has the great combination of a high dividend return along with an undervalued price going forward.
The Home Depot (HD): The orange home-improvement retailer offers a wide range of building materials, home-improvement products, gardening products and professional services to assist with all of it. The company also offers a great dividend, $0.25 per fiscal quarter, for a yearly yield of 2.99%. The company can sustain this with its ample earnings per share of $2.08 and cash flow per share of $2.91. What’s amazing here is that the company has sustained such a dividend and averaged an incredible 18.76% dividend growth rate per year over the past five years. With 13.11% earnings growth estimated for the next few years, Home Depot will be able to keep up this trend of big dividend increases.
With the current recession and the depression in the housing market, Home Depot and its competitor Lowe’s (LOW) are facing a decline in customers willing to spend time and money on home improvement. While Lowe’s has struggled in recent quarters, Home Depot has been busy optimizing its store format, finding supply chain efficiencies, and refocusing on core businesses. As a result, the company has reduced costs to stay much more competitive as well as increase profits despite falling sales. In addition to a generous dividend, the admirable skills of the management at Home Depot are what make HD an attractive stock, even during this post-bubble housing market.
Cisco Systems (CSCO): Cisco makes and sells internet protocol networking products such as router hardware, IP telephones and servers for the IT industry, along with related installation, maintenance and consulting services. While its dividend yield isn’t dazzling at 1.59%, this is also the first year the infrastructure company has offered a payout at all-- and $0.24 on the year is a good start. This is especially true once we consider the loads of excess earnings and cash flow that Cisco brings in, which could go towards supporting a higher dividend in the future. With $1.28 EPS and a 9.96% earnings growth rate, Cisco will easily beat the industry average 2% yearly dividend increase for the foreseeable future.
As far as company prospects, CSCO stock has tanked to $15.12 a share in the past few months amidst worries of IT spending pullbacks and new competitors in the networking space. However, as developed countries increasingly rely on data services such as mobile phones, cloud storage, and online retail, the market for IT hardware and services will be highly lucrative. Cisco is concentrating its efforts on being the market leader in networking infrastructure to better meet this huge surge in demand, and it has the piles of cash to make such a strategy successful. With a very low forward P/E of 8.74 and a PE/G ratio of just 0.96, CSCO is a beaten down stock with great dividend potential ahead.
Pfizer (PFE): The New York-based global pharmaceutical corporation Pfizer develops and sells some of the world’s most recognized drugs such as Lipitor and Viagra. Its stock also pays out an exciting $0.80 in dividends per share, which translates to a 3.98% dividend yield. Though it has $2.84 in cash flow per share, more than enough coverage for the dividend, EPS are relatively weak at $1.05. Thus it makes sense that in the last five years dividends have been cut back slightly by 1.08% annually.
On the global scale, Pfizer has been expanding into critical new markets with moves such as an acquisition of a European multivitamin supplier and a deal with Zhejiang Hisun to provide low cost drugs in China. At the same time, the company is aiming for $1bil in extra yearly cost savings from administrative efficiencies. However, these will be low revenue generators compared to the exclusive drugs Pfizer sells. The patent for the top-selling Lipitor drug is set to expire in November of this year, and generic cholesterol reducers will become a tough challenge for Pfizer. Revenue is expected to fall by 2% this year and the above average PE/G ratio of 3.28 indicates it will be expensive. PFE stock does not appear to be a strong growth candidate, but if you’re searching for dividend returns, the high yield rate here is intriguing.
Abbott Laboratories (ABT): Abbott is another company developing and selling pharmaceuticals, but it also operates divisions focused on other health care goods, namely nutritional products, diagnostics systems, and vascular products. The firm’s $1.92 dividend is good for a 3.77% annual return on investment. The steady 9.86% increase in dividends every year for the last couple years is a good sign of Abbott’s ability to earn excess cash over the long term. An even better sign? Abbot Laboratories’ stock has paid a dividend every quarter since 1924 and has been able to raise the amount paid out every year for since 1972. This is a feat that only 4 other companies in the S&P 500 have managed.
That’s not to say there’s nothing else to like about the company. Abbott provides irreplaceable diagnostics systems for hospitals and physicians, develops treatments for challenging diseases like Parkinson’s and AIDS, and nutritional supplements to consumers through the EAS and Ensure brands. For the next year, sales are expected to grow 9.4% and earnings by 9.87%, for a PE/G ratio of 1.25 and a forward P/E of only 10.28. If you’re looking for a stable stock that pays a dependable and substantial dividend, it doesn’t get much better than ABT.
Altria Group (MO): Previously known as the Philip Morris Companies, Altria manages the manufacturing and sales of several lines of tobacco and wine products. You don’t have to be a smoker or wine connoisseur to appreciate the stock payout though, $1.52 a share for an amazing 5.63% return on equity. However, the dividend has been shrinking in recent years, which makes sense given that Altria’s cash flow is only $1.33 per share last year and can’t keep up with the large sums needed for the quarterly cash payments.
Altria Group, which depends on domestic cigarette sales for much of its revenues, is being hit hard by new anti-smoking laws that are emerging around the country. To keep up, Altria is trying to innovate and promote new smokeless varieties of tobacco products like Camel Snus. It will take some time though - Altria is only expect to increase sales by 1.4% this year and then by 2.4% in the next year. MO is probably not a stock to hold if you need good growth prospects. However, its princely dividend makes it notable for those who want the guaranteed payments.
PepsiCo (PEP): The well-known food and drink manufacturer produces popular soft drinks as well as foods under the Frito-Lay and Quaker brands. The stock gave a healthy $2.06 dividend this year, representing a nice 3% yield. PepsiCo’s EPS is on the soft side at $3.74, but two signs keep this from being a worry. First, the company generates lots of extra cash, $5.43 in cash flow per share, and second, it's been able to keep up an annualized 13.35% dividend growth rate over the last five years.
Projected revenue growth isn’t shabby, at 14% for this year, and neither are estimated earnings increases of 9%. Analysts who follow food brands expect a hot summer this year, which is correlated with an increase in soft-drink sales. For PepsiCo’s part, the company is introducing new drinks for consumers who are becoming increasingly health conscious. With a forward P/E of 13.99, PEP is good stock in the food and drink sector that can manage quite some growth while still returning a steady dividend.
The Coca-Cola Company (KO): The iconic cola manufacturer, along with its lines of sodas, produces several different brands of juices, teas, waters and sports drinks. The massive amount of cash that it can earn from its well established products means that it can offer a 2.88% yielding dividend of $1.88 for each share. What’s more, it has grown this dividend by an above-average 9.46% every year and its 9.23% expected annual earnings growth would allow it to keep up this pace.
Besides the expected boost from summer heat, Coca-Cola is finding new success in new markets as it expands to grow rapidly in countries like China. The company has a goal outlined for the next 10 years named the 2020 Vision, to double global sales and improve profitability margins. If executed as planned, this will be an incredible source of value for shareholders over the next decade. For any investor, it should be hard to say no to a company that has been able to achieve as much growth and pay out as significant a dividend as Coca-Cola has.
Exelon Corp. (EXC): Exelon is a utilities holding company that provides electricity and heating through renewable and non-renewable sources, with 5.4 million customers across Illinois and Pennsylvania. The stock manages to pay out a dividend of $2.10 for a heaping annual yield of 5.02%. Its EPS is relatively weak – only $3.75 – but the company has a good cash flow of $4.80 per share, and the stock’s ability to maintain 5.59% annual dividend growth, above-average for the industry, is not bad either.
Exelon is one of the U.S. leaders in operating nuclear power plants and is quickly expanding with modern electrical grids and renewable energy sources. For analysts, the recent worries about nuclear power after the Japanese earthquakes have reflected poorly on EXC. Expected revenue growth has been cut to 1.4% and earnings growth is almost non-existent at .2%. However, Exelon should generate enough excess cash to ride out this downtrend in sentiment and keep paying the high dividend. By a P/E ratio comparison and a simple DDM valuation estimate, EXC is vastly undervalued compared to its peers and still has a lot of potential. The very generous dividend from the company is just the icing on top of the cake.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.