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Investing in high-dividend stocks is one of the simplest ways to outperform the market. Even if the markets experience short-term ups and downs, the dividends can provide a soft cushion against capital losses. Traditionally, a substantial portion of the market returns have been due to the dividends. The contemporary market conditions also favor high-dividend stocks over fixed-income securities. The FED's decision to keep interest rates low has created a rare bubble in the bond markets, where the interest rates are near their historical lows.

In this low-interest atmosphere, retirees or soon-to-be-retirees should seriously consider switching to high-yield bond alternatives. We haven't yet seen the inflationary effects of the FED's expansionary policy. But we are very likely to experience a higher inflation in the near future. A nifty alternative to paltry bond yields could be high-dividend stocks. The dividends can provide a strong hedge against rising prices during high-inflation periods. Consequently, a diversified portfolio of high-dividend stocks can support superior returns for the long-term investors.

For many of us, living on dividends and/or having a lined-up cash-flow from dividends is essential. Besides all other reasons, a strong retirement account requires solid and stable dividend income. Therefore, I looked for the top-yielding U.S.-based companies that are trading at reasonable valuations. I set the minimum yield to be 5%. In order to make sure that earnings fully support the dividends, I set my screening criteria with maximum trailing and forward P/E ratios to 20. In the 2011 edition of the ultimate dividend list, financial stocks were excluded due to the extreme volatility regarding both their share prices and dividend payments. However, financials are in much better shape this year. Therefore they are also included in the ultimate retirement portfolio list. Each stock in this list has a minimum market cap of $2 billion. (Stock market data is retrieved from Finviz, and/or Morningstar.) Here is the ultimate dividend list:

Company

Sector

P/E

Dividend Yield

YTD Return

Alliance Resource

Partners LP (NASDAQ:ARLP)

Basic M.

7.54

6.46%

-17.92%

Southern Copper (NYSE:SCCO)

Basic M.

11.18

6.71%

1.73%

Rhino Resource

Partners LP (NYSE:RNO)

Basic M.

12.21

10.34%

-1.64%

Alliance Holdings

GP, L.P. (NASDAQ:AHGP)

Basic M.

11.8

6.03%

-17.70%

TC Pipelines LP (NYSE:TCP)

Basic M.

14.49

6.99%

-5.59%

El Paso Pipeline

Partners, L.P. (NYSE:EPB)

Basic M.

16.81

5.83%

0.47%

Williams Partners L.P. (NYSE:WPZ)

Basic M.

14.79

5.59%

-7.88%

Plains All American Pipeline, L.P. (NYSE:PAA)

Basic M.

16.39

5.17%

11.51%

Linn Energy, LLC (NASDAQ:LINE)

Basic M.

16.17

7.11%

4.27%

Spectra Energy Partners, LP (NYSE:SPE)

Basic M.

19.39

6.07%

0.38%

Enbridge Energy Partners LP (NYSE:EEP)

Basic M.

16.13

6.95%

-6.13%

Reynolds American (NYSE:RAI)

Consumer G.

17.38

5.37%

2.08%

Altria Group (NYSE:MO)

Consumer G.

19.37

5.16%

8.58%

Pitney Bowes (NYSE:PBI)

Consumer G.

9.75

8.89%

-7.10%

Ares Capital (NASDAQ:ARCC)

Financial

10.29

9.22%

6.29%

Two Harbors (NYSE:TWO)

Financial

8.21

15.47%

16.31%

Chimera (NYSE:CIM)

Financial

5.35

15.83%

14.88%

MFA Financial (NYSE:MFA)

Financial

8.06

13.24%

11.54%

NY Community Bancorp (NYB)

Financial

12.07

7.67%

7.50%

Mercury General (NYSE:MCY)

Financial

12.72

5.51%

-1.64%

Valley National Bancorp (NYSE:VLY)

Financial

15.96

5.47%

3.36%

Gannett (NYSE:GCI)

Services

7.52

5.91%

2.65%

PPL Corp. (NYSE:PPL)

Utilities

9.99

5.32%

-6.85%

Entergy (NYSE:ETR)

Utilities

8.73

5.06%

-9.12%

Exelon (NYSE:EXC)

Utilities

10.05

5.57%

-11.94%

Pepco Holdings (NYSE:POM)

Utilities

16.15

5.82%

-7.24%

Integrys Energy (NYSE:TEG)

Utilities

18.34

5.13%

-0.95%

Ameren (NYSE:AEE)

Utilities

14.62

5.09%

-3.91%

Average

12.9

7.25%

-0.5%

The average year-to-date performance of the companies listed above is -0.5%. One of the reasons that the above list picked the underperformers is primarily due to the fact the yield is based on dividend payments per share price. Thus, a lower share price automatically translates into a higher yield (holding dividend payments constant). While this might not look impressive, it provides a marvelous opportunity for contrarian investors. Most of the stocks listed above could be considered value stocks, which pay nifty dividends. One might want to consider these stocks, while their prices are much lower than the peak valuations.

Basic Material Picks

The list shows several basic material stocks, most of which are master limited partnerships. MLPs are among the top choices of income-oriented investors. These investment vehicles offer yields that are much higher than the average yield in the equity markets. MLPs are not tax exempt, but their distributions can be registered as capital depreciation, effectively reducing their tax base. Thanks to this favorable tax status, these companies offer substantial distributions to the unit holders. Given the low-interest environment, their distribution rates are much better than the paltry interests offered by government bonds. Most MLPs are suffering from overvaluation issues, and they are leveraging their balance sheets to keep up with their yields. However, the ones listed above offer yields, which are more or less covered by their earnings.

Other than MLPs, the list includes Southern Copper, which is one of the largest copper producers in the world. The stock is highly correlated with copper prices, which move in line with the demand for copper. As we are experiencing some sort of recovery, copper prices might go higher, pushing Southern Copper along the way. I think this company could be a good one to play global economic recovery.

Consumer Goods

Reynolds American and Altria are among the world's largest tobacco producers. While I do not appreciate their business, the shareholders are very happy to hold on to their shares. Reynolds American and Altria returned 22%, and 29% in the last 12 months, respectively. They also have very low Beta values. As such, they could be good diversifiers. Pitney Bowes is also in this list. After losing nearly 30% of its market cap, the stock offers a yield of 8.89%.

Financials

The list shows several financial stocks, most of which are mortgage real estate investment trusts. mREITs are also among the top choices of income-oriented investors. These institutions operate as pseudo-banks, acquiring short-term loans to invest in long-term mortgage-backed securities. They are usually managed by external management teams. The management invests in securitized long-term loans, which are originally borrowed by the property owners. The financing comes from low-interest borrowing.

These companies also use leverage in their balance sheets to make the most out of the interest-rate spread. The distributions provided by mREITs are subject to favorable tax rules. mREITs are exempt from corporate taxes as long as they distribute at least 90% of their income in the form of dividend payouts. Thanks to this favorable tax status, most mREITs pay double-digit dividends. I was worried that the FED's "Twisted Plan" could trigger a spread squeeze by flattening the yield curve. However, in a very nicely written article, fellow SA contributor, Prof. Doug Short shows that operation twist did not have much effect on the yield curve. So, I am still bullish on mREITs.

Service Sector

Gannet Inc. is the only service company that made it on this list. The company offers a yield of 5.91%, which is supported by a low payout ratio of 44%. The company is involved in traditional newspaper sector. While Cramer does not like this stock, it is a cheap one a valuation basis.

Utilities

Utility stocks are among my favorite ones. While many investors discard utility stocks as boring investments, this sector has outperformed the broad market indices with a substantial margin. Performance of utility companies is mostly compared with long-term government and corporate bonds.

I think investors, holding the low-yield treasury bills or bonds, should seriously consider dumping them and buying utility stocks instead. Surely, the performance of any stock is subject to short-term volatility. There is always the possibility of capital loss in the stock market. Nevertheless, the power of mean reversion can produce highly superior returns for long-term investors.

The utility stocks listed above can serve as a good starting point for income-oriented investors. My favorite one is Exelon, which has a 4-star rating from Morningstar. It is trading at a P/CF ratio of 5.2, and pays a yield of 5.57%. The stock has been an underperformer this year, but it could be a nifty long-term pick.

Source: Top Dividend Picks For The Ultimate Retirement Portfolio (2012 Edition)