The financial markets have been volatile over the past few years. Individual investors were getting out of equity mutual funds and buying into bond funds. Investors may think that bonds are better investments than stocks, and that they are less risky. However, we do not think it is a good idea to invest in Treasury bonds. We actually believe that bonds are actually riskier than stocks, because it is likely that long-term bonds may have negative yields after taking inflation into account. In fact, the 10-year Treasury bond has a yield of around 2%, while many stocks have higher dividend yields. Under the current market conditions, we think long-term Treasury bonds don't yield enough to protect investors from inflation, but strong high dividend yielding stocks, especially those with high growth potentials, may be able to do that. In this article, we are going to take a closer look at some of the high dividend stocks with high growth expectations.
The Blackstone Group (BX): Blackstone is a well-known investment company that manages private capital. BX has a dividend yield of 5.63%, almost 3 times the yield of 10-year Treasury bonds. BX is also expected to grow at an average of 17.75% per year over the next five years. It has expanding profit margins and attractive valuation levels. BX's forward P/E ratio is only 7.37, the lowest among all US asset management companies, with an over $10 billion market cap. With an expected growth rate of 17.75%, BX's P/E ratio for 2015 is less than 5, versus 9 for BlackRock Inc (BLK).
Lorillard Inc (LO): Lorillard is the manufacturer of cigarettes in the United States. Its most popular brand is called Newport, which accounted for about 90% of LO's sales. LO has a high dividend yield of 4.80%, nearly 250% of that of 10-year Treasury bonds. LO's EPS is also expected to grow at an average of 11.43% per year over the next five years. The main competitor of LO is Reynolds American Inc (RAI), which also has a high dividend yield. RAI's dividend yield is 5.50%, versus 4.80% for LO. RAI's expected growth rate is lower though. Analysts estimate its EPS to grow at around 6% annually over the next five years. RAI's P/E ratio for 2014 is 11.1, versus 10.6 for LO. We actually like both RAI and LO. Both stocks are attractively priced and have higher growth rates than most utilities.
Thomson Reuters Corporation (TRI): Thomson Reuters provides information for the world's businesses and professionals. The company's products are getting more diversified in recent years, which we think will enable TRI to deal with economic downturns better. The company also has an impressive record of dividend growth. It has been increasing its dividend payouts for 18 consecutive years, and its current dividend yield is 4.52%. Recently, TRI announced that it would increase its quarterly dividend from $0.29 to $0.31 per share, which will be paid to its shareholders in March. TRI is also attractively priced. Its forward P/E ratio is 12.93 and its EPS is expected to grow at over 11% per year in the next five years. This means that its P/E ratio for 2014 is about 10.5.
Overall we do not think it is a good time to invest in Treasuries right now. We see potential inflation of about 2-3% per year in the next couple of years, while the 10-year Treasury bonds only yield 2% before taxes. Although stocks are more risky than bonds, a stock that yields about 5% will not underperform the bond unless it loses over 20% in the next decade, which is almost impossible for a well-diversified portfolio of high dividend stocks.