There aren't a lot of stocks that can grow their earnings at a high rate and offer decent dividends. However, we have identified the five following stocks which offer both, earnings growth as well as a dividend yield higher than 5%. Ranging from the healthcare to the asset management industry, some of these companies are well-positioned to take advantage of their industry dynamics and to give good returns to investors along the way. We find two of these stocks risky, and recommend long positions in the remaining three high dividend stocks.
Health Care REIT (HCN): Heath Care REIT is a real estate investment trust investing in the healthcare properties in the United States. The share price has gone up by 15% in the past twelve months, and it is now trading at a forward price to earnings ratio of 14 times. The company also offers an attractive forward dividend yield of 5.2%, with a payout of 278%. The payout has gone up (in percentage terms) due to the decline in earnings, however, with hardly $0.70 cash per share, there might be some risk of a dividend cut going forward. Other companies in the sector, like HCP (HCP) and Ventas (VTR) currently offer lower yields of 4.7% and 4.1% respectively.
Health Care REIT has not only maintained its quarterly dividends since 2007, its dividends have also shown a small increase in this time period. After a 56% decline in earnings last year, the company's recent quarter reported a 250% earnings growth over the same period last year. The United States has the third largest population in the world, growing at a rate of approximately 1%, and an increasing share of people who are over 65 years of age (12.8% estimated in 2010 and 13.1% in 2011). This indicates that the demand for healthcare, specifically related to senior living facilities, is bound to show a strong and steady growth. The average analyst's consensus gives an estimate of an 11% long term growth in the stock. This strengthens our belief in the earnings growth for Health Care REIT in the long term, though investors should wait for its earnings to recover before investing for the sake of the company's dividends.
Frontier Communications Company (FTR): After a decline in stock prices of 47% over the past twelve months, the stock is offering a forward dividend yield of 15.4% and is trading at a forward price to earnings ratio of 18.7 times. What makes us interested in the company's growth is its recent acquisition of a part of Verizon (VZ)'s wireless services, which was acquired for $8.5 billion. This horizontal integration on Frontier's part means that its customer base has almost doubled. The company's balance sheet was also affected, however, even after paying for this transaction; the company has a current ratio of 0.83 and positive cash flows. Although there is negative sentiment in general due to the news of some customers shifting away, we believe that this is part of business and should not overly concern investors. Frontier is one of the many companies which were forced to cut dividends. While the company's current assets remain steady, there is some uncertainty concerning its dividends in the short term. This is mainly on account of the high payout. No other company in the sector is currently offering the same rate of growth, and other companies like AT&T (T) and Fairpoint Communications (FRP) are operating at lower margins of 16% and -12%, versus Frontier's margins of 19%. We believe that the stock should be avoided at present due to uncertainty in its dividends.
CenturyLink (CTL): CenturyLink, despite operating in the same industry as AT&T and Frontier, has not seen the same increase in its fortunes as the other companies. The reason for this is its recent string of acquisitions - CenturyLink acquired Qwest in a $22.4 billion deal as well as Sawis in 2011. These acquisitions have already started improving the company's revenues - more than $18 billion in 2011 - and are expected to start trickling down to the bottom line soon. The company is currently trading at a forward price to earnings ratio of 14.7 times, and offers an impressive forward annual dividend yield of 7.6%. Despite its recent acquisitions, the balance sheet of the company is holding up well, with a current ratio of 0.8, and total debt to equity of 1:1. More importantly, the company's dividend payout in dollar terms has also been maintained, despite a decrease in quarterly earnings. This, we feel, is a positive sign from the management regarding stable dividends as well as expectations of earnings recovery shortly. We think the stock is a great buy for the long term due to the recent developments.
Integrys Energy Group (TEG): Integrys Energy, part of the utilities sector, saw its share price increase by 6.3% over the past twelve months. At current prices, the stock is trading at a forward price to earnings ratio of 14.1 times, and is offering a forward annual dividend yield of 5.3% with a payout of 82%. Despite the decline in revenues (9.7% average in the past 5 years), the company's earnings have managed to increase by 2.7% annually over the past five years. Despite the decline in its revenues, the company continued to maintain its quarterly dividend of $0.68/share in the past twelve quarters. We expect the same to continue. The company has decent operating margins of 10% and average estimate of analysts' consensus suggest an 8% growth in earnings for this full year. The company's dividend yield is much higher than Alliant Energy Corporation's (LNT) yield of 4.2% with similar growth prospects. That's why we rate this stock a buy.
Federated Investors Inc. (FII): Federated Investors is one of the bigger names in the asset management industry, managing over $350 billion in assets. The company recently announced the acquisition of the London-based Prime Rate Capital Management. Last year, the company's stock lost 30%, due to an 11% year-on-year decline in its quarterly earnings. At its current prices though, the stock offers a dividend yield of 5.2%, and is trading at a forward price to earnings ratio of 11.3 times. This is lower than other companies like BlackRock (BLK), trading at 12.5 time its future earnings. With a 5 year average growth of 13.7% in dividends and a positive outlook, we rate this stock a buy.