There are studies that stock that pays hefty dividends outperforms the market in the long run. We have listed dividend stocks that are owned by 'smart money' gurus. Knowing that these stocks are owned by legendary investors allows us to be confident in this uncertain market.
Reynolds American, Inc. (RAI)
Reynolds American, Inc. is a tobacco company that operates brands Camel, Pall Mall, Winston, Doral, Salem, Misty and Capri. The company is a typical tobacco company that has slow but growing cash flows. For the last 5 years, it has grown its revenues by 1% and earnings per share of 6.37%. The investment appeal in these types of companies is that they are somewhat defensive in nature and pays out most of its earnings to its shareholders. In fact, the company has a payout ratio of 86% and has grown its dividends by 11.87% for the past 5 years.
Shares of RAI have increased by 15% for the year. This is mainly due to the attractiveness of the stock’s steady income feature. Despite the increase in its shares, it carries a dividend yield of 5.70%. This is higher than Lorillard, Inc. (LO)’s 4.70% dividend yield, as well as Philip Morris International Inc. (PM)’s 3.80% yield. Analysts expect that the company to earn $5.23 a share next year, 9.40% higher than the forecasted earnings per share this year. This implies a 7.23 times earnings. At these valuations levels, the market is not discounting its future prospects. David Winter and Joel Greenblatt have RAI in their portfolio.
NuStar GP Holdings LLC (NSH)
NuStar GP Holdings LLC is another master limited partnership (MLP) stocks. Since there are incentives to distribute the earnings of MLP’s, investors should expect that over time they tend to have higher income distributions. NSH’s assets are mostly companies engaged in the petroleum business. These businesses are engaged in terminaling, storage, transportation and marketing of petroleum products. They have terminal facilities in the United States, Netherlands, Antilles, Canada, Mexico and United Kingdom.
It has recently announced quarterly distribution of $0.495 a share. At run-rate, the dividends per share will be $1.98, or equivalent to a yield of 5.90%. This is somewhat higher than the yield of similar MLPs like Kinder Morgan, Inc. (KMI) has a yield of 4%, but in line with Enterprise Products Partners Limited (EPD)’s 5.90%. Revenues have grown by 12.17% over the last 5 years and earnings per share have also steadily grown by 28.97% during the same period. The key to looking at MLP’s is its dividend performance. It has steadily increases its dividends by 5.32% over the last 5 years. Shares of NSH have fallen by 8.70% for the year and could be a good entry point at these levels. Legendary investors Chuck Akre and Jean-Marie Eveillard are owners of NSH.
Cincinnati Financial Corp (CNIF)
The company is a property and casualty insurer. Its sales force is independent insurance agents across different states. It operates under different segments such as commercial lines, personal lines, excess and surplus lines, life insurance and investments. The market has declined by 1.71% for the year despite the market volatility we have seen these days.
The stock has a beta of 0.76, which makes it attractive to investors who are worried about market swings. It has also a hefty dividend yield of 6.10%, higher than most property and casualty insurers. Peers like American Financial Group (AFG) and Selective Insurance Group (SIGI) have yields of 2.07% and 3.67% respectively. Although dividends have grown at 5.70% over the past 5 years, payout ratio is high at 88%, higher than the sector’s payout ratio of 75% and S&P of 32%. Analysts are expecting earnings per share to be $1.48 next year, suggesting a price earnings ratio of 17 times. This is higher than AFG’s 8 times earnings and SIGI’s 12 times. The market likes to pay up better profitability and strong track record of underwriting discipline. Several legendary investors own this stock. This includes Jean-Marie Eveillard, Ken Fisher and Charles Brandes.
First Niagara Financial Group Inc. (FNIG)
First Niagara Financial Group has transformed from a community bank based in New York to a regional bank with various retail and commercial banking services. Its financial track record appears good, mostly due to acquisitions of branches. This led to an average revenue growth of 42% over the last 5 years. Earnings per share were flat, associated to acquisition costs. Recently, it has acquired NewAlliance Bancshares and HSBC’s New York and Connecticut branches for $1.5 billion and $1 billion respectively. The transactions added some 283 branches and $33 billion in deposits. This also looks like a good deal for the company as it strengthens its position in its home-based in Buffalo, New York while moving into different parts of the country.
Shares of FNIG have declined by 25% for the year. This is mostly to investors dumping financial stocks right now. At the current price of $10.59, the stock is valued at 8.54 times next year’s earnings and dividend yield of 6.40%. This may seem low as the company has been valued at 14 to 30 times historically. Its nearest competitors M&T Bank Corp. (MTB) and New York Community Bancorp (NYB) are both valued at 10 times earnings with dividend yields of 3.90% and 8.30% respectively. Veteran investor Martin Whitman, a lover of “safe and cheap” stocks owns this stock.
Lloyds Banking Group Plc (LYG)
Lloyds Banking Group is a retail bank based in the United Kingdom. With the concerns on contagion of the European debt crisis, investors have avoided financial stocks. Shares of LYG have dropped by 49.64% for the year. The issue with financial stocks is whether they can withstand the current crisis or not. In the case of LYG, the U.K. government owns 43% in the bank and has been giving cash subsidy to the bank. The bank has been controlling its expenses and may need to cut further jobs in the near-term.
The stock is trading at 18% above its 52 week low. At the current price levels, the stock is trading at 9.45 times next year’s earnings and 0.61 times book value. It seems that the market is betting of a bank failure soon. In contrast, the market seems to be valuing other banks higher. HSBC Holdings Plc (HBC) has valuations of 10 times earnings and 0.93 times book value. As soon as the company survives the crisis and return to pre-crisis probability, it will buy back shares from the U.K. government and start paying dividends. Analysts pegged the target price of LYG at $4.58, or double from the current levels.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.