As the Fed continues to keep interest rates at an extremely low level, dividend yielding stocks will become more and more attractive to investors. Coupling a 5%+ dividend yield with low market volatility and you have the beginnings of a great income portfolio for a retiree. Below are 5 stocks with great dividend yields and low volatility that may be a great addition to any portfolio.
Annaly Capital Management (NLY) - Whenever I discuss dividend yielding stocks, Annaly almost always comes up in the conversation. It's a stock that almost always seems to be an attractive buy. It has extremely low volatility with a beta of 0.31, and its dividend yield of 13.30%, or $2.28 annually is almost too good to pass up. Typically when a stock has a dividend yield that high, many investors feel that it is not sustainable. However, because Annaly is real estate investment trust, REIT, the company must pay at least 90% of its taxable income as dividends. With the company's current earnings per share, the stock has a price to earnings ratio of 8.9. This is almost 3 times the industry ratio of 23.3 and well below the ratio of the S&P as a whole. Although the price to earnings growth of Annaly is somewhat high at 2.34, it is still less than some of its competitors such as Capstead Mortgage Corp. (CMO) and Redwood Trust Inc. (RWT) with ratios of 2.76 and 4.87 respectively. Annaly, as well as other REIT companies received good news in January as the Fed announced that interest rates would remain low through 2014. This is a good thing for the industry as this will reduce the cost of funding, which will in turn increase interest rate spreads and dividends. Ultimately, with the company's current levels as well as ongoing low interest rates, I believe Annaly will remain profitable for investor's in the future.
Altria Group, Inc. (MO) - Another attractive dividend stock is one that some investors do not like as much due to the company's business in general. As the parent company of Phillip Morris, Altria is the market leader in tobacco products. The company has a very low beta of 0.45, making it half as volatile as the market. Additionally, the company has a dividend yield of 5.70% or $1.64 annually. The company's earnings per share of $1.64 give the stock a price to earnings ratio of 17.6 which is right in line with the industry average of 17.2. Compared to Reynolds American Inc. (RAI), Altria has the better price to earnings growth at 1.62 compared to 2.38. However, the industry ratio is slightly less than both at 1.44. After reporting the fourth quarter earnings, Altria beat analysts' estimates giving the stock a recent boost in price. Even though analysts predict a slight increase in price with a mean target estimate of $31, the stock's low beta and attractive dividend make it one to consider.
Eli Lilly & Co. (LLY) - Eli Lilly, like the previous companies mentioned, has lower volatility than the market with a beta of 0.62. The stock has a dividend yield of 5.0% which translates to $1.96 annually. The current earnings per share of $3.90 give the stock a price to earnings ratio of 10.1 which is almost half of the industry ratio of 17.1. This gives the appearance that the stock could be undervalued at its current level. The price to sales ratio is also considerably less with a ratio of 1.88 compared to the industry ratio of 4.84. One area of concern is the company's quarterly revenue growth year over year is a negative 2.30% where competitors GlaxoSmithKline plc (GSK) and Sanofi (SNY) are positive at 4.30% and 11.10% respectively. However, this may just be the sign of a mature company as other competitor Pfizer Inc. (PFE) has a negative percentage of 4.60%. Going forward in 2012, it looks as if Eli Lilly may lose additional profits as the company's No. 1 product, Zyprexa, is no longer patent protected and the company should expect to see increased competition from generic medications. This information could be what is giving the stock a lower than industry price to earnings ratio. With other drugs losing patents in upcoming years and the company elected to freeze base pay for most employees in 2012, Eli Lilly may have a rough stretch this year.
Exelon Corp. (EXC) - With a beta of only 0.50, Exelon is considered half as volatile as the market. With a dividend of $2.10, or 5.30% yield, it can be a very attractive investment for just about any portfolio. The company's current earnings of $3.75 per share give the stock a price to earnings ratio of 10.6. Although this may seem like a low number in general, it is right around the industry level at 11.8. Even the price to book level is average at 1.83 compared to the industry at 1.37; though it is about half of the S&P 500's ratio of 3.74. The stock's price has dropped as of late. Part of this reason is due to low natural gas prices. If the price of the stock rebounds and the price to earnings ratio reaches or exceeds the industry ration, then the dividend yield would most likely then drop below 5%. I believe at the current price with the dividend offered this stock looks to be attractively priced.
Reynolds American - The final company on the list is another tobacco company and a direct rival of Altria, although Reynolds is worth a look on its own. Although the company as one of the higher betas on the list at 0.59, it is still considered to have low volatility compared to the market. The stock currently has a dividend yield of 5.60%, or $2.24 annually. With earnings per share of $2.28, Reynolds has a price to earnings ratio of 17.5, which is right in line with the industry. However, the company's price to book value is only 3.45 compared to the industry which is an extremely high 30.68. Comparing Reynolds ratio to that of the S&P 500 at 3.74 seems more reasonable and gives the appearance that the stock is accurately valued at current levels. Analysts believe that the stock will rise, but not by much with a median target price of $41.00. At the stock's current price, this would only be about a 2.5% increase. However, add in the dividend and it could add up to a 8% gain. As long as the Fed keeps interest rates down, a stock like Reynolds should be ok for 2012.