by Nathan Slaughter
This select group of 21 stocks might be the holy grail of investments: each has delivered high yields AND sizeable capital gains.
Conventional wisdom says you have to choose one or the other. Income investors usually think they have to forfeit higher returns in exchange for a stable dividend. But this is a misconception.
We did some research a few weeks ago to uncover the best-performing income stocks on the market. To do that, we narrowed the high-yield universe down by evaluating only stocks with yields of 6% or more. From there, we identified the standouts that earned the highest total returns during the past 10 years.
Now, everyone knows this has been a difficult stretch for most investors. In fact, some have referred to the past 10 years as the "lost decade." But we found 21 elite stocks that made it look like we've been riding a nonstop bull market. Here's a sampling of what they look like:
- Hugoton Royalty (NYSE: HGT), a trust that generates 87% of its income from natural-gas properties, pays a yield of 6.3% and has returned 347% since 2001.
- United Online (Nasdaq: UNTD), an Internet-based provider of consumer products and services, has returned 426% with help from its 7.1% dividend.
- BP Prudhoe Bay (NYSE: BPT) conveys an ownership stake in oil and gas wells located in Alaska's legendary Prudhoe Bay. Thanks to its 8.6% yield, investors have enjoyed a return of 2,320% during the past decade.
Now, I don't have the space to go into all the details of each of the 21 best-performing stocks here. But you can watch a presentation I recently put together that lists the names and ticker symbols of every one of these stocks.
But it's not so much the raw list of names and tickers that I want to tell you about. Rather, I want to share an unmistakable trend that emerged as we compiled this leader board of high-yield winners. As it turns out, 12 of the 21 best-performing income stocks in the United States in the past decade were pulled from the energy field. That's 57% of the total list.
Keep in mind, the energy sector only accounts for about 15% of all domestic stocks yielding 6% or more. So for this one group to represent more than half of the biggest winners seemed highly disproportionate.
This raises the question... why have dividend-paying energy stocks done so well? It's not just their lofty distributions. After all, every stock we examined offered a minimum 6% payout. Could it be that energy stocks in general have been on fire? Energy stocks have done pretty well during the past 10 years. That's not surprising -- it hasn't been THAT long since gasoline was under $1 a gallon and oil was priced less than $30 per barrel. It makes sense energy companies would profit handsomely in this sort of environment.
But if you dig deeper, then you find an even more startling trend. As a group, energy stocks have returned 290% in the past 10 years... an impressive number under any condition. But, if you take this list and limit it only to dividend payers -- then the average return jumps to 589%. In other words, energy stocks that pay dividends doubled the performance of what was already one of the market's strongest sectors.
If you think about it though, then this spectacular run makes sense.Energy is in one of the biggest bull markets we've ever seen. But unlike some other historic bull markets, such as the high-flying "New Economy" of the late 1990s, fundamentals are driving prices this time -- not delusions.
Now you may be thinking... does this mean energy has already seen its heyday?
The simple answer is I don't think so. In fact, I think energy is still in the early innings of its bull market.
If you don't believe me, just look at China. China's new car sales volume in 2010 leaped 32% to 18 million new cars. This means nearly 50,000 new vehicles are hitting the road every day...
But this is just a drop in the bucket to what we'll see in the future. Ford (NYSE: F) projects China's auto sales will reach 32 million by 2020 -- 28% of the entire global market.
And China is not the only factor. Nor are cars and trucks the only source of demand.
Daily global oil consumption has swelled from 77 million barrels in 2001 to 89 million today. And trust me when I say that emerging-market demand is pushing this burn rate straight to 100 million per day and beyond. Where will that extra 11 million barrels per day come from? Good question.
Most of the largest oil fields are in a terminal state of decline. In fact, the International Energy Association (IEA) has concluded that output from 800 top oil fields is shrinking 6.7% annually.
The combination or rising demand and thinning supplies paints a pretty clear picture. Oil prices are ultimately headed higher, or at the very least are likely to remain elevated. So don't let the fears of a global economic slowdown dampen your outlook.
We've seen record-high unemployment, sagging consumer spending and too many corporate bankruptcies to count here in the United States. If this weren't enough, the market has also been rocked by violent political uprisings in the Middle East, crippling debt woes in Europe and our own inability to corral deficit spending.
But through it all, global demand for energy has been, and continues to be, staunch. In fact, we've only seen one decline in annual energy consumption in the past 30 years. Just one. That was a trifling 1.1% dip in 2009, as the world economy struggled to regain its footing from the worst downturn since the Great Depression.
That being said, it's no wonder dividend-paying energy stocks have performed so well. Because dividends are such a critical tool in building wealth, it stands to reason that the energy sector, with an abundance of high yielders, is a fertile hunting ground for investors.
There are no guarantees, of course. In this market, anything can happen (as the past few months have proven). Energy prices could remain volatile as signs of economic deceleration in developed economies continue to hang over financial markets.
Looking from a long-term perspective, dwindling reserves and rising global demand will inexorably lead to higher oil prices. And judging by the past 10 years of stock-market data, you can only reach one conclusion: the combination of robust yield and commodity-driven share price gains seems to make good things happen time and time again.
Disclosure: Neither N. Slaughter nor StreetAuthority, LLC hold positions in any securities mentioned in this article.