In the 1970s, when I started investing, I never thought I would write an article with the above title. We had periods when you could earn 20% on money market funds, a single-digit mortgage rate was unheard of, and an employee getting a 10 per cent raise wondered what he had done wrong because he wasn't keeping up with inflation. I know that those days are gone, but today's interest rates still leave me in a state of disbelief.
Anyhow, I can't possibly list all of the stocks with dividend yields higher than the interest rates on 10 year Treasuries (both the Dow 30 and the S&P 500 now have average dividend yields well in excess of the interest rates on 10 year Treasuries). Even the list of stocks with yields in excess of the interest rates on 30 year Treasuries is very, very long. I was hoping that Geithner would start issuing 100 year bonds or perpetual consols and that these might have slightly higher interest rates, but so far, no luck. So, in order to produce a manageable list, I am forced to limit it to stocks whose dividend yield is at least twice the interest rate on 10 year Treasuries. The cut off is 1.96% x 2 = 3.92%.
Here, I am beginning to notice something of a pattern. A kind of 4% "glass ceiling" is beginning to emerge. For a stock to yield more than 4%, there usually has to be something a bit special about the situation. Of course, many electric utilities yield more than 4%, but they tend to have much slower growth prospects than unregulated companies. Business development companies and real estate investment trusts often yield much more than 4%, but their dividends are generally taxed as ordinary income, and they are paying a very high percentage of income out as dividends.
Certain companies have yields in excess of 4% because there is a perception that the dividend may soon be cut. But it is generally becoming unusual to find a solid, growing company with a yield in excess of 4%. Of course, this means that, as companies increase their dividends, stock prices will tend to rise to keep the yield below 4%.
In the case of each of the companies on this list, there seems to be somewhat of a justified or unjustified concern about the potential decline of all or of at least a significant part of the business. I own some of these stocks and do not completely share the concerns, or else believe that they are more than priced in.
I have excluded utilities from the list because, in many ways, they are not truly comparable to other stocks. I have also excluded BDCs, REITs, and MLPs because these are specially organized yield vehicles subject to different legal rules and, again, not strictly comparable. In each case, I am including the yield based on Monday's closing price.
1. AT&T (NYSE:T) (5.9%) - A financially strong company with some very good growth prospects in wireless but still perceived somewhat as a regulated company with a declining wireline business. T is also in a business which is a voracious consumer of CAPEX. I like this stock, and I think that anyone who puts his money in treasuries instead is badly mistaken.
2. Altria (NYSE:MO) (5.2%) - Everyone knows the downside here - the domestic market for cigarettes is declining due to customer attrition and aggressive anti-smoking advertisements and regulations. MO has other lines of business, but Marlboro is still riding tall in the saddle for this company. A great cash flow producer properly discounted for real risks.
3. Verizon (NYSE:VZ) (5.2%) - The premier cell phone company but, again, burdened with a declining wireline franchise and a constant need for CAPEX. VZ has some very strong territories in the Northeast and the legacy GTE properties. It also seems to have the bulk of the FIOS expenditure behind it. Another situation in which I really cannot see a case for being in treasuries rather than this stock.
4. Leggett & Platt (NYSE:LEG) (5.2%) - A furniture and home products manufacturer with some strong brands and market share. On the other hand, the depressed housing market limits the potential for growth. Some analysts believe that there will be a boom in multi-family housing construction (apartments) soon and this could give this company a jump start. The price is probably depressed because of exposure to the housing market.
5.Merck (NYSE:MRK) (4.3%) - A well positioned drug manufacturer which is perceived as having a strong pipeline. Big Pharma comes with a number of risks - lawsuits for side effects of drugs, drugs coming out of patent, drugs taken off the market, and probably most importantly, an enormous continuing need for CAPEX. The sector is definitely growing, and should continue to grow, but these problems have led many of the stocks to be depressed.
6.Bristol-Myers Squibb (NYSE:BMY) (4.0%) - Another big Pharma company with all of the pluses and minuses identified above.
Going through this list, I have personally decided to jump into Big Pharma on the next dip. It is interesting that each of these stocks has a kind of "risk factor" that seems to be able to keep the yield over 4%. I think that this 4% level may become significant and that companies may bounce off this ceiling so that dividend increases will produce equivalent stock price increases to keep yield below 4% - yet another feature of the interest rate-dominated stock market we all must navigate.
Disclosure: I am long VZ, MO, T, LEG.