By Carla Pasternak
If you're frustrated by the paltry 2% yield of the average stock in the S&P 500 (NYSEARCA:SPY), you're not alone.
Thankfully, you don't have to reach for yield by investing in unstable companies or engineer a complex options strategy just to get little extra income. Readers of my High-Yield Investing newsletter know that it's just a matter of knowing where to look.
These five stocks offer more than double the average yield of the U.S. equity market -- and have far outperformed it. The S&P 500, gained about 2% in 2011, including dividends, but these standouts actually delivered average total returns of 35.4% in the same 10 months.
Their long-term performance is just as impressive. In the past half decade, they returned an average 11% a year, while stocks in the S&P 500 are at break-even.
To find these income plays, I screened for steady, reliable dividend payers that grew both dividends and earnings in good times and bad.
Over the past five years, these companies hiked their dividends an average of 6% a year. They are an exemplary group of dividend growers, considering that the 500 industry leading companies in the S&P 500 actually reduced their dividends by 1% annually over the same five years.
Moreover, these shareholder-friendly companies have the wherewithal to support their dividend increases. Like many high-yield stocks, most of these companies are designed to pay out cash flow and raise money to grow by issuing shares.
So it's especially impressive that as a group they've been able to grow per share earnings at an average clip of 12% a year during the past five years. The 7% growth rate of the S&P 500 pales by comparison.
Past returns and growth rates can't predict future performance, but these five picks look set to continue delivering growing dividends and attractive overall returns going forward. Earnings projections are difficult to come by, as some of these companies are not widely followed. Nevertheless, the average estimated growth rate for all but two of them (whose projections are unavailable) are a healthy 8% annually over the next five years.
Dividends for the group are expected to grow in tandem with earnings. According to Bloomberg projections, which have proven to be more than 90% accurate, their dividends are anticipated to grow an average 4% annually over the next three years.
All but two of these companies are expected to grow their dividends (Reynolds and Sunoco are the exceptions) -- and are forecast to grow dividends at an especially fast clip of 6% annually over the next three years. The nice thing about dividend growth, besides the bigger paycheck, is that investors often bid up stocks on their dividend hikes, so total returns look promising as well.
Judging by their low beta -- which measures how volatile their returns are compared with the S&P 500 over the past year -- their performance can be expected to hold relatively steady whether the markets go up or down. The S&P 500 has a beta of 1 but every one of these picks carries a beta of less than 1.
Reynolds American, for example, carries a one-year beta of 0.6. That suggests the stock's returns tend to be around 40% less volatile than the overall stock market, so whether stocks go up or down, it should continue providing relatively steady returns.
Some of the others owe their resiliency to being major players in a unique market niche. Medallion Financial (Nasdaq: TAXI) and W.P. Carey & Co. (NYSE: WPC) are investment firms, but Medallion specializes in the business of making loans to cabdrivers that need to buy a taxi medallion license to drive their cabs. Taxi medallions are the legal permits needed to operate taxis in certain cities. Carey's business is worldwide, but it's equally focused: it makes real estate deals to help property owners free up capital for other investments.
National Retail Properties (NYSE: NNN) and Sunoco Logistics aren't niche players, but they operate under long-term agreements. National has tenants such as the U.S. government and Sunoco Logistics with oil refiner-marketing giant Sunoco Inc. (NYSE: SUN), among others.
All these equities are outperforming in a tough market and have also have outperformed over the long term. They carry above-average yields and have a strong track record of earnings and dividend growth. Better yet, they are projected to grow their dividend in the years ahead, which should further support their share price and performance going forward.
Disclosure: Carla Pasternak does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of TAXI, WPC, NNN, RAI, SXL in one or more if its “real money” portfolios.