By Renee O'Farrell
With Treasury bond and other more predictable forms of investments offering returns as low as 1.7%, if not lower, savvy investors are looking outside the box to the stock market and dividend-yielding stocks in general - and with good reason. There are lots of stocks that offer dividend yields of more than 2%. Plus, unlike a Treasury bond, the stock earns investors a return independent of the dividend yield. Picking the right stock can easily mean returns of over 10% a year and investors have much easier access to that money.
Turning our attention to stocks with dividends over 3%, with low payout ratios that have earnings growth estimates of more than 10% per annum, and that are priced low, four big names emerge - Staples (SPLS), Intel (INTC), Prudential Financial (PRU) and AFLAC (AFL).
Staples recently traded at just over $13 a share, down 4.20% year to date. At this price, the company is trading at 8.11 times its forward price to earnings ratio, a considerable discount to its peers' average of 16.84. Consensus estimates are that Staples' share price will reach $17 (range $12.50 to $22) in the next year. If the mean target is correct, that's an increase in share price of nearly 30% over the next year. The company also pays a 3.33% dividend yield on a 28.23% payout ratio, further adding to the upside. Ray Dalio's Bridgewater Associates is bullish on Staples.
Intel is trading at just over $26 a share right now, up 9.67% year to date and at 9.74 times its forward earnings, a fair bit lower than its peers' average of 15.46. At this price, Intel has a dividend yield of 3.21% on a payout ratio of 33.02%. On average, analysts estimate this stock will reach $30 a share in the next year (range $19 to $35). If the consensus is right, investors buying in today would enjoy upside of 15% over the next year, plus the dividend. Intel is a favorite pick of Paul Ruddock and Steve Heinz's Lansdowne Partners.
Prudential Financial is currently priced at $46 a share, down 8% so far this year. The company has a forward price to earnings ratio of just 5.87 compared to its industry's average of 10.37. Right now, Prudential Financial is paying a 3.15% dividend yield on a payout ratio of roughly 35%. The consensus is that the company will be trading at almost $69 a share in the next year (range $62 to $77). If the mean analyst target price is correct, investors could earn 50% in upside over the next 12 months plus get the dividend. Andreas Halvorsen's Viking Global likes Prudential Financial.
AFLAC is trading at $39.49 a share, down 6.61% year to date. It pays a 3.31% dividend yield on a payout ratio of just under 25%. The company's forward price to earnings ratio is 5.80, compared to its industry's average of 10.37. Consensus estimates put AFLAC at just under $55 a share in the next year (range $34 to $75), making its upside over 39% if analysts are correct - and that doesn't count the dividend. Legg Mason Capital Management is a fan of AFLAC.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
