In these difficult times with low interest rates, many are looking for higher yielding investments. A good place to look is the S&P 500 Dividend Aristocrats (S&P 500 companies which have increased dividends for at least the last 25 consecutive years). 42 remain because they continued raising dividends through the recession in 2008 when many highly regarded former members ended their streaks. 6 with the highest yields (over 4%) deserve consideration for increasing investment income. In all fairness, higher yields carry higher degrees of risk and those with the highest yields, carry the greatest risk.
(1) CenturyLink (CTL) offers the highest yield at 8.6%. CTL is the 3rd largest telecommunications company in the US, providing broadband, voice and wireless services with 190,000 miles of lines. It has been acquiring companies including Qwest last year and Embarq properties in July 2011. The annual dividend has been increased (currently $2.90) for 37 years, but that could end by December. 72½¢ quarterly dividends were paid in 2010 and in the first 3 quarters of 2011. Unless the dividend is increased by a penny in Q4, the company will be dropped from this elite group in December. CTL said it has "significant free cash flow to sustain our dividend and support strategic investments and acquisitions." Sustain suggests no dividend increase.
(2) Pitney Bowes (PBI) has a yield of 7.6%. The company sells mail equipment and services, this business has been sluggish in the last decade (especially in the US). But PBI has been upping the dividend every year (typically 2¢ in recent years) which allowed it to become a Dividend Aristocrat with 29 consecutive years of dividend increases. The mail business has many critics which explains its very high yield. While the macro picture for the mail business is not good (this week the UPS said it needs more help because of its $10 billion deficit), mail service continues. Direct mail (junk mail) business is good, PBI is expanding its software business and global mail is growing.
(3) Cincinnati Financial (CINF) with a 5.8% yield is one of the 25 largest property casualty insurers in the US. But earnings of insurance companies are difficult to understand. Besides ongoing earnings, there are casualty losses and investment income (with gains/losses) which vary sharply from one year to the next. For example, record-breaking catastrophe losses (in 2011) depleted operating earnings for Q2 and H1 although book value per share rose above the December 31, 2010 level. While the company has an impressive record of raising dividends for 50 years, the annual dividend was raised a only penny last month.
(4) Leggitt-Platt (LEG) yields 5.1% but is difficult to understand because its does not manufacture final products. Instead it makes components for bedding, furniture and auto seating. It has been increasing annual dividends for 40 years, but 4 years ago it made a substantial increase in the dividend to $1 (just before the recession hit). Since then, annual increases have been limited to 4¢ as earnings have barely covered the dividend. Cash flow is good allowing LEG to purchase 40 million shares in the last 3 years.
(5) Con Edison (ED) with a 4.3% yield is the nation’s largest investor-owned utility supplying needs to New York city area. Many investors are not fans of utilities but ED is a Dividend Aristocrat and has been increasing the annual dividends for 37 years. But increases have been modest, just 2¢ in recent years. The stock is subject to political whims but it has survived over the years. The stock pulled back from $50 to $35 during the last recession and has risen to $56, not a bad record.
(6) Kimberly-Clark (KMB), offering a 4.1% yield, is a paper company with popular brands such as: Kleenex, Scott, Huggies, Pull-Ups, Kotex and Depend. These brands typically hold #1 or #2 share positions in more than 80 countries. The stock has been increasing the annual dividends for 39 consecutive years. Unlike the other 5, KMB has had significant increases in recent years, from $1.80 in 2005 to $2.80 in 2011. The next increase should be announced in February.
Dividends are key for capital growth, about 40% of investment gains come from dividends. Dividends are the direct connection between management and shareholders, their way of rewarding shareholders. Companies that demonstrate the strongest connection are Dividend Aristocrats, especially after the last decade when many of the strongest companies have mediocre stock charts. The highest yielding discussed here all have their problems making them less than perfect investments (as do all companies). They operate in a variety of business fields, hopefully at least one will be helpful to an individual investor. My favorite is LEG. Analysts are forecasting EPS will rise to $1.33 this year and $1.70 next year. If they are right, larger dividend increases will bring higher stock prices.