A Dividend Stock Yielding 8% That Is Poised To Outperform Verizon

Jul.26.12 | About: Energy Transfer (ETP)

Even though the market is well below the highs of 2012, many dividend stocks have been in rally mode and have even been hitting new 52-week highs. The demand for yield and market volatility is not likely to go away soon and that is why it makes sense to look for dividend-paying companies that have very stable business models. With many economic data points pointing towards a possible recession, investors need to look for companies that won't see big revenue drops if times get tough.

For many investors, Verizon (NYSE:VZ) shares have been a great way to create income, stability, and even some capital gains in their portfolios. Verizon is a well-known provider of communication services and it pays a solid dividend that beats the average yield for a stock in the S&P 500 Index, which is just over 2%. However, Verizon shares have become a crowded trade and this has pushed the stock up from about $37 in April, to almost $46 in just about 3 months. The ever-increasing price of Verizon shares has pushed the yield down, which means future returns will be much more limited for investors buying at the currently elevated share price.

Smart investors should consider that there are alternatives that could even be poised to outperform Verizon shares in terms of both dividend yield and even capital gains potential. One such stock could be Energy Transfer Partners (NYSE:ETP). Here are a few reasons why investors should consider this stock now:

Energy Transfer Partners operates a network of energy pipelines that transport natural gas through a number of states including: Alabama, Arizona, Arkansas, Colorado, Florida, Louisiana, Mississippi, New Mexico, Utah and West Virginia and Texas. This company owns about 23,500 miles worth of pipeline now, but that figure is due to grow as it has agreed to acquire Sunoco (NYSE:SUN) which will greatly expand the existing operations.

The pipeline business is relatively recession-proof because consumers and businesses need energy to operate. Also, since this company charges fees for allowing natural gas to be transported in its pipelines, it is not subject to the volatility of energy prices. That means natural gas prices could fall and this company could still generate strong profits. This stock offers a yield of about 8%, which is nearly double the rate offered by Verizon. Also, this stock is trading below the 52-week high, mostly because of a recent stock offering, which raised funds to pay for the acquisition of Sunoco. As time goes on, these shares will probably be pushed up to new 52-week highs.

A final big plus is that even Jim Cramer likes this stock, and he even said "I think the pipeline master limited partnerships could be terrific places to wait out this rocky market because of their fabulous yield protection.". Energy Transfer Partners shares have all the makings to be a great addition to an income portfolio: upside potential, a hugely rewarding yield, and a stable business model. For these reasons, it could easily outperform Verizon shares in the future.

Key Data Points For Energy Transfer Partners From Yahoo Finance:
Current Share Price: $44.80
52-Week Range: $38.08 to $51
Dividend: $3.58 which provides a yield of 8%
2012 Earnings Estimate: $1.49 per share
2013 Earnings Estimate: $2.24 per share
P/E Ratio: about 30 times earnings

Verizon Communications is a leading provider of mobile phone services, Internet, long distance, etc. This company is paying about 75% of its earnings out in the form of a dividend. As such, the rate of dividend growth is likely to be stunted when compared to other stocks which are trading at a lower price to earnings ratio and that has more room to raise the dividend.

Early this year, Verizon shares were trading around $36, but the stock has had a huge run thanks to investors looking for income and a relatively stable business model that can work in a weak economy. After major gains and with the stock trading near 52-week highs, investors should consider that additional upside is not as likely. Also, the yield is now below 4.5%, which also makes the shares less attractive for quarterly income. Investors might want to consider taking some profits and waiting for pullbacks, as well as diversifying into other stocks.

Key Data Points For Verizon From Yahoo Finance:
Current Share Price: $43.53
52-Week Range: $32.28 to $46.41
Dividend: $1.76 per share which yields 4.4%
2012 Earnings Estimate: $2.50 per share
2013 Earnings Estimate: $2.79 per share
P/E Ratio: about 18 times earnings

Data is sourced from Yahoo Finance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.