As I have written most recently here, in the current low interest rate environment, investors can often find more attractive yield opportunities in equities than in bonds, and investors' dividend hunger can put a floor under a declining market. As the market has declined, more and more stocks are sporting attractive dividend yields. For this article, I tried to identify blue chip equities with yields that are more than twice the yield on 10-year Treasuries (1.81%). I excluded REITs, BDCs, MLPs, and utilities and limited myself to conventional companies. I also excluded any company which had cut its dividend during the 2008-09 Crash/Recession.
There may be others but I found that Merck (NYSE:MRK), Boeing (NYSE:BA), Emerson Electric (NYSE:EMR), Exxon Mobil (NYSE:XOM), Verizon (NYSE:VZ), AT&T (NYSE:T), and Qualcom (NASDAQ:QCOM) all made the cut. The table below provides Friday's closing price, current dividend yield, price earnings ratio (NYSE:PE) based on consensus analyst current year earnings (from Yahoo Finance), and the percentage price change on this past Friday for each of these stocks.
These stocks span a number of different industries although the two highest yielders (VZ and T) are in the telcom industry. XOM stands out from the pack having a very high PE - that reflects declining oil prices as well as some investor confidence that the oil price will recover and restore XOM's earnings to previous levels. QCOM represents the new wave of tech dividend stocks - tech stocks that are so depressed and have so much cash flow that they have now become attractive simply based on dividend yield. 5 out of the 7 stocks on the list actually advanced on Friday, which was a terrible day for the market with the S&P 500 Index losing more than 2%. This may be a sign that investors desperate for yield are finally piling into safe dividend stocks; if so, this should tend to put a floor under the market.
XOM - XOM is the old Standard Oil of New Jersey and the major successor to the empire of John D. Rockefeller. It has been paying dividends since before the First World War. Although the decline in oil prices adversely affects its earnings, it earns a great deal of money downstream through refining and distribution and is probably the best positioned company in the oil industry to ride out the storm. Investors will be watching the dividends closely because Conoco Phillips (NYSE:COP) cut its dividend last week and there is understandable apprehension about dividends in the oil sector.
BA - BA is a major defense contractor but its primary business is the production of commercial jets. This business has become a duopoly and, while there is competition, it is not ruinous. BA has an enormous backlog of orders - enough to keep it busy for longer than my actuarially calculated remaining life (I am 71). The low oil prices are a double-edged sword for BA. On the one hand, the airlines have more money to spend and demand for air travel should increase as lower fuel costs lead to lower rates. On the other hand, one of the main motivations for airlines buying new jets has been improved fuel economy and that has become less important with lower petroleum prices.
MRK - MRK is one of the "major" drug companies with an impressive pipeline of drugs in several key areas. Most notably, MRK is poised to expand its role in the sleep market (with Belsoma), the hepatitis C market (with Zepatier) and the cancer cure market (with Keytruda). MRK has a very strong research operation which seems to constantly generate new products. Unlike some others in the industry, MRK did not cut its dividends during the 2008-09 Crash.
EMR - EMR is an often overlooked powerhouse which has increased its dividends every year for over 50 years. It provides electrical equipment and services - to business and household customers. These include climate control products, business automation products and services, process solutions and household electrical products. It has a diversified line of businesses and seems to have become relatively recession-proof. It is also always in a position to spin off a business or two if necessary.
QCOM - QCOM is one of many tech companies which have been hammered in the recent pull back. It has a very strong balance sheet with $13 per share of net cash. Therefore, the dividend is safe for the foreseeable future. QCOM is a chipmaker and technology licenser and controls key aspects of modern wireless technology. It has been in the process of dealing with some underreporting and compliance issues with companies using its technology in China but appears to be getting the situation under control.
VZ and T - These two companies are the leaders in mobile telephony but they have land line businesses as well. They are each trading at very low PE's and very high dividend yields which may make them each "a good place to hide" as markets become volatile. Both of these companies have been growing earnings in recent quarters. They are each primarily wireless companies with less reliance on revenue from declining landline operations. VZ has been reducing share count over the past several years. These companies were two of the strongest stocks in the group in Friday's market action and this may suggest that we are at or near the bottom for these two.
It is hard to believe that an investor who buys a 10-year Treasury bond today and collects his 1.81 percent interest will do better - 10 years from now - than an investor who buys a portfolio made up of these 7 stocks. The yield provided by the stocks will mean that, unless there is a precipitous decline in stock prices over the next 10 years, the investor who buys the stocks is bound to win. The dividends paid by these companies will very likely increase substantially over the next 10 years and the stocks will probably generate considerably more than 40-50% of their current value in dividends over that period as compared to 18% over the ten years on Treasury bonds.
The fact that most of these dividend stocks performed quite well in an absolutely horrible market on Friday is a sign that we may be nearing a support level - at least for strong dividend stocks.
Disclosure: I am/we are long XOM, COP, MRK, T, VZ, QCOM, BA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.