At a time when U.S. Treasuries are still hovering around 2% and finding yield that is backed by any kind of reasonable credit is a real challenge, finding quality stocks that offer aggressive dividend yields is rare. Whether one decides to make this his or her primary investment strategy, or considers high yielding stocks as solid additions to a portfolio with other goals, being aware of some of these companies that stand out, both in terms of yield and the quality of the companies, is advisable.
This article focuses on four such companies and discusses not only the income element of each, but how each respective company is positioned amongst its peers, and how it stacks up against the general market. While some take the view that a company paying an outsized dividend is a red flag, these companies do garner attention and should be on a conscientious investor’s radar.
BCE, Inc. (BCE) – Paying a dividend yield based on the recent trading history of 5.5%, BCE edges out its close competitors – Rogers Communications, Inc. (RCI) and TELUS Corp. (TU) – in terms of income generation while still remaining solid across other financial metrics. Operating in the telecom services segment, which carries an industry average trailing price-to-earnings ratio of 19.7, BCE is solidly amongst its peers on this metric. BCE trades at a trailing price-to-earnings ratio of 15.4, RCI is at 14 and TU is at 14.7. The slightly increased multiple is easily explained by the better income profile. In terms of operating efficiency, BCE has an operating margin of 22.3% against RCI at 23.7% and TU at 19.8%. This segment of the market appears very strong in terms of these key metrics and these companies, led by BCE, offers a nice income element that is backed by a solid company.
Arthur J Gallagher & Co. (AJG) – Offering a dividend yield of 4.8% that is aggressive even amongst other insurance companies, AJG appears to be well positioned to perform, having recently announced the acquisition of St. Louis- based S.A. Freerks & Assc (SAFA). The company sees synergies that should aid in mid-term growth that, when combined with the stock’s outsized dividend, help justify the stock as a buy while still have average financial metrics. The company’s competitors include Aon Corp. (AON), Marsh & McLennan Companies, Inc. (MMC) and Willis Group Holdings (WSH). If one considers price-to-earnings ratios and operating margins for each, as well as the industry averages, AJG does not stand out – for price-to-earnings ratio, AJG is at 18.9, AON is at 16.8, MMC is at 15.8, WSH is at 22.4 and the industry is at 18.6; for operating margins, AJG is at 12.7%, AON is at 14.8%, MMC is at 13.5%, WSH is at 22.7% and the industry is at 15.6%. What these figures underline is that AJG is an income play. The strong strategic vision and solid positioning for the future lends credibility to the company’s long-term stability, but it is hard to see the company as a shining star for near-term stock price performance. The dividend should be safe under management’s capable hands.
AmeriGas Partners LP. (APU) – This limited partnership offers a handy dividend yield of 6.5%, placing it in the upper echelon of dividend plays, particularly when one considers the stability of gas utilities overall. It is important to note, however, that the company is structured as an LP which means it will receive non-standard tax treatment which should be understood by any investor before buying into the stock. On the natural gas front, the commodity has been severely range-bound for an extended period of time – use the exchange-traded fund, United States Natural Gas (UNG), as a good proxy – but indicators are turning more favorable.
Two things that favor natural gas are the seasonality of heading into the winter months and the fact that UNG is in the lower part of the established range. It may be poised to break higher, but even at current levels, price weakness is not likely to have a huge impact. While competitor Ferrellgas Partners LP (FGP) does offer an even higher dividend yield near 10%, this company had negative earnings and operates at around half the efficiency, with an operating margin of 5%, relative to 9.5% for APU. Competitor Suburban Propane Partners LP (SGU) has a stronger valuation with a price-to-earnings ratio of 9.1, relative to 17.4 for APU, and a dividend yield of 6.2%, but the stock has an operating margin of just 4.8%. Furthermore, SGU has a market capitalization of under $350 million dollars and trades less than 100,000 shares daily. This lack of liquidity can be problematic should something go awry. Amongst its peers, APU offer the strongest overall profile while still providing an excellent income element.
Ameren, Corp. (AEE) – This company, which offers an impressive 5.2% dividend yield, is a great example of one of the things that can happen when playing dividend stocks. The company recently filed a form 8-K to announce material impairments to its balance sheet as the result of its closing of three U.S. based plants. The plants are being closed as a response to the cost of complying with certain Environmental protection Agency (EPA) rules. While it is likely that the company will recover and perform – its stock price has shown only minor responses to the news – the critical metrics have been hit hard. This suggests that there may be better options currently, although those who have initiated positions already will not be hurt badly by riding out the storm. A potential substitute, or a diversification play if one can take two positions, is Great Plains Energy, Inc. (GXP). The company, at a market capitalization of $2.7 billion relative to AEE at $7.3 billion, offers a dividend yield of 4.2%, operates at similar efficiency with an operating margin of 19.8% relative to 19.1% for AEE, but has stronger valuation metrics. Where AEE has a price-to-earnings ratio of 76.8, GXP trades at a 16.3 multiple. Overall, AEE is a strong company with a very attractive income profile, but being aware of recent impairments, other options or diversification is advisable.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.