Why own any stock if it isn't yielding at least 4%? Dividend investing has always been popular, but the volatility in the market today has made dividend investing more popular today as ever.
Indeed, While some stocks, such as Apple (AAPL), are up over 30% this year, and the S&P 500, and its tracking exchange traded fund, SPY (SPY), are up over 20% from the market's summer low, dividend stocks continue to outperform most of the broader indexes.
While the S&P 500 and most of the broader indexes have performed almost as well as many high yielding funds over the last three months, high yielding funds are still paying almost double the average dividend most companies in the S&P 500 currently payout.
Still, while dividend investing in a low rate environment today is about the here and now, I think its important to make sure the high yielding stocks your investing in have strong future growth prospects as well.
Microsoft (MSFT) currently has $60 billion dollars in cash on the company's balance sheet, the company is generating nearly 25 billion a year in free cash flow, and analysts are projecting an average five year growth rate of between 8-10%.
While Microsoft's dividend and buyback program was insufficient in moving the stock higher in previous years, the company's shares have rallied recently as management has increased the dividend payout by over 25% a year the last two years. Microsoft is currently a nearly $260 billion dollar company with no debt, and the company can borrow at extremely low rates.
Microsoft has also shown impressive revenue growth with the company's windows seven launch, and continues to have success some new products, such as the XBOX.
While Microsoft is obviously not a consumer staple name, the company's recurring revenue streams from its software products such as windows should provide very stable and strong forms of revenue for years to come.
Lorillard (LO) is the smallest of the three big tobacco companies in the U.S., and management has raised this company's dividend by over 20% a year the last three years. While Lorillard's larger peers, Altria (MO) and Reynolds (RAI), have borrowed at unfavorable rates to enter less profitable businesses such as the smokeless tobacco segment, Lorillard is the only large U.S. tobacco company that continues to show impressive organic growth in the company's cigarette sales.
Lorillard has less than 15% of the U.S. tobacco market today, and management has effectively marketed new products such as the Maverick cigarette, enabling the company to continue to show strong market share gains and growth in annual cigarette shipments over the last several years.
Lorillard's dividend payout ratio of 68% is also lower than Reynolds's and Altria's payout ratio, and the company has much better debt to equity ratio than both of those larger companies as well.
While some investors have feared FDA actions against menthol cigarettes, which comprise over 90% of the company's revenues, as I've discussed in previous articles, the recent pro-tobacco statements by the FDA suggest investors should not be concern over this agency taking action against menthol.
Finally, BP (BP) is another company that should be able to significantly increase the company's dividend over the next couple years. While, BP, obviously, is heavily dependent on the price of oil, oil prices have remained fairly consistently high even during periods of economic weakness over thet last three years.
Today BP's dividend payout ratio is just 16%, less than both of the company's larger North American peers, Chevron (CVX) and Exxon-Mobil (XOM). BP also historically has paid out 40-60% of the company's revenues as well.
BP raised its dividend by 15% last year, and has reached a settlement with most of the plaintiffs in the civil case against the company. With oil prices high and a settlement with the Gulf States and Federal government likely near, the company should be able to raise its dividend significantly over the coming years.
To conclude, today's highest yielding stocks may be the most appealing investments, the company's with the strongest revenue growth and a solid dividend are likely to offer the best returns to shareholders longer-term.
While even companies with only modest revenue growth may be able to raise the company's dividend each year in a low rate environment, companies will eventually likely have to show inflation adjusted returns to continue to be able to borrow at low rates and raise the company's dividend as growth and inflation expectations likely rise in coming years.