Income seeking investors often like to screen for companies that pay handsome dividend yields. In some cases, dividend yields can be as high as or even higher than yields on corporate bonds. Unfortunately, companies that have paid large dividends in the past may be about to cut their future dividends, which is the primary reason for stocks trading at eye-popping historical dividend yields. For example, Nokia (NOK) trades at a published dividend yield of nearly 8%, but the company has warned of a sharp drop in earnings, making a dividend cut seem likely.
In order to minimize the probability of a prospective dividend cut, we have looked for companies that pay dividend yields of at least 5% and are expected to earn sufficient income going forward to fully cover the anticipated dividend payments. History has shown that managements are reluctant to cut dividends to shareholders. As a result, if their companies are earning enough money to keep paying the same (or higher) dividends, it seems likely that no dividend cut will be imminent. Of course, there are no guarantees, and investors should always do their own work prior to buying a company that offers a seemingly compelling dividend yield.
The following are seven companies we find particularly interesting in light of their high dividend yields and their likely ability to keep paying those dividends:
AllianceBernstein Holding (AB) ($20 per share; MV $2.1 billion; EV $2.1 billion), based in New York City, provides diversified investment management and research services and has 4,000+ people. Roughly one-third of the assets managed by the company come from clients located outside the U.S.
It is important to note that this publicly traded entity, AllianceBernstein Holding, merely holds an investment in the operating company, AllianceBernstein. This investment amounts to 37% of the economics of AllianceBernstein (the remainder is held primarily by financial services giant AXA). Assets under management of the operating company decreased 2% from $487 billion at the end of 2009 to $478 billion at yearend 2010 (assets stood at $473 billion as of May 31st). The sell side expects AllianceBernstein to earn $1.64 per share in 2011 (12x P/E), with $1.71 (12x) and $2.05 (10x) in subsequent years.
The company trades at 1.2x tangible book value of $1.8 billion. The annual dividend of $1.27 per share, a decrease of 3% from a year ago, implies a yield of 6.3%. A recent investor presentation includes detailed information on the performance of certain AllianceBernstein funds as well as a breakdown of assets by strategy and geography. Chairman and CEO Peter Kraus has stated:
We are off to a solid start in 2011. Gross sales increased by double-digit percentages across all of our distribution channels compared to the fourth quarter of 2010, net outflows as a whole declined substantially - particularly in the Institutions channel - and we grew our adjusted operating income and expanded our adjusted operating margin.
AstraZeneca (AZN) ($50 per share; MV $68 billion; EV $65 billion) is a major pharma firm that develops cardiovascular, gastrointestinal, infection, neuroscience, oncology and respiratory and inflammation medicines. It had ten drugs with annual sales of $1+ billion in 2010, including Crestor, Nexium, and Seroquel. Crestor sales rose 26% from $4.5 billion in 2009 to $5.7 billion in 2010, while total revenue increased 1% to $33.3 billion in the period. The Street expects AstraZeneca to earn $7.17 per share in 2011 (7x P/E), followed by $6.07 (8x) and $5.97 (8x) in subsequent years. The annualized dividend of $3.00 per share, an increase of 18% from a year ago, implies a yield of 6.0%. AstraZeneca has boosted the dividend six times in seven years, delivering an annualized growth rate of 18% for the period. AstraZeneca has a high-return business, with a seven-year average return on equity of 36%.
Lincoln Educational (LINC) ($19 per share; MV $440 million; EV $430 million), based in West Orange, NJ, provides career-oriented, post-secondary education under the Lincoln Technical Institute and other brands. It recently operated 45 campuses in 17 states, offering degree and diploma programs in health sciences (40% of enrollment), automotive technology (30%), skilled trades (11%), business and IT (10%), and hospitality services (9%). Title IV programs accounted for 83% of revenue in 2010. Average student enrollment rose 13% from 28K in 2009 to 32K in 2010, while revenue rose 16% in the same period. The Street expects Lincoln to earn $1.62 per share in 2011 (12x P/E), with $1.50 (13x) and $1.31 (15x) in each of the next two years, respectively. The annual dividend of $1.00 per share implies a yield of 5.1%.
Safe Bulkers (SB) ($7.90 per share; MV $560 million; EV $1000 million), based in Athens, Greece, provides marine dry bulk transportation worldwide for coal, grain and iron ore. The company recently had a fleet of 16 dry bulk vessels, with a carrying capacity of 1.4 million deadweight tons and an average age of four years, giving it one of the youngest fleets of Panamax, Kamsarmax, Post-Panamax and Capesize vessels. The fleet should grow rapidly through 2014, with aggregate carrying capacity expected to increase 76% as a result of the delivery of 11 contracted newbuilds. When those newbuilds are delivered, the fleet will have 27 vessels with a capacity of 2.5 million dwt. The time charter equivalent rate per day declined 14% from $34K in 2009 to $30K in 2010, while revenue decreased 5% during the same period. Analysts expect Safe Bulkers to earn $1.47 per share in 2011 (5x P/E), with $1.61 (5x) and $1.59 (5x) in each of the next two years, respectively. The annual dividend of $0.60 per share implies a yield of 7.6%. This dividend may be threatened by the company's financial leverage and the need to finance newbuilds. Safe Bulkers raised equity capital a few months ago. As a result, one might view the dividend as being financed by capital raises -- not a comforting thought.
Telefonica (TEF) ($23 per share; MV $106 billion; EV $181 billion) is a leading provider of fixed and mobile telephony services in Spain, the rest of Europe, and Latin America. The customer base, measured in terms of total accesses, increased 9% from 265 million in 2009 to 288 million in 2010, while revenue increased 7% in the period. The Street expects Telefonica to earn $2.55 per share in 2010 (9x P/E), with $2.54 (9x) and $2.46 (9x) in subsequent years. The annual dividend of $1.97 per share, an increase of 7% from a year ago, implies a yield of 8.5%. Telefonica has boosted the dividend five times in seven years, delivering an annualized growth rate of 27%. The company operates a high-return business, with an average return on equity of 39% over the past seven years.
United Online (UNTD) ($6.40 per share; MV $570 million; EV $720 million), based in Woodland Hills, CA, provides consumer products and services over the Internet through the brands FTD, Interflora, Memory Lane, Classmates, StayFriends, NetZero, and MyPoints. FTD segment revenue increased 2% from $546 million in 2009 to $555 million in 2010, while total revenue declined 7% to $921 million during the period. The sell side expects United Online to earn $0.87 per share in 2011 (7x P/E), followed by $0.83 (8x) and $0.81 (8x) in the following years. The indicated dividend of $0.40 per share implies a yield of 6.2%. CEO Mark Goldston owns 3% of the company (valued at roughly $19 million), giving him a strong incentive to maximize shareholder value. Goldston commented recently on the launch of a new Internet property:
In February, we launched our new Memory Lane website, representing what we believe is the largest archive of nostalgic content on the Internet covering the 1940s through the 1990s, while still retaining key features of our historical Classmates.com business. The new Memory Lane website is evolving and, we believe, will enhance our ability to create new revenue streams from e-commerce and pay-per-view transactions in addition to enhancing the revenues we derive from paid subscriptions and advertising. We continue to add yearbooks to the website and currently have approximately 90,000 yearbooks available online.
Vodafone (VOD) ($27 per share; MV $136 billion; EV $186 billion) provides mobile telephony services around the world. The number of mobile customers globally rose 15% from 324 million in the fiscal year ended March 31, 2010 to 371 million in FY11, while revenue increased 3% during the same period. Wall Street expects Vodafone to earn $2.66 per share in FY12 (10x P/E), with $2.90 (9x) and $3.19 (8x) in the following years. The dividend of $1.44 per share implies a yield of 5.4%. Vodafone has boosted the dividend six times in seven years, with average annual dividend growth of 21% for the period. The company's U.S. affiliate, Verizon Wireless, "has continued to perform strongly," according to management. Organic service revenue at Verizon Wireless rose 6% and EBITDA was up 7%, with "good growth in customers and strong data take-up."
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.