By Matt Doiron
With interest rates low, more attention is being drawn to income investing - investing in bonds with substantial coupon payments and in stocks with substantial dividend yields. Capital invested in this strategy does not tend to appreciate much, but it generally does not decrease either and the investor can live off the interest without having to worry too much about disruptions to their cash flow. Obviously, if a company defaults on its bonds or cuts its dividend payments then an investor will lose out, but these risks can be reduced by selecting large-cap companies in a stable sector of the economy. While consumer discretionary stocks tend to be highly sensitive to consumer spending, consumer staples generally are less correlated with changes in the broader economy. Using market data from Fidelity, here are five large-cap consumer staple stocks which each post a dividend yield greater than 4.5%:
Avon Products (NYSE:AVP)
Reynolds American (NYSE:RAI)
Altria Group (NYSE:MO)
Avon's nearly 6% dividend yield is one good reason to take a stake in the $7 billion market cap cosmetics and housewares company. While its margins are low, its revenues are high and after a -39% pummeling in the market over the past year, its trailing P/E ratio is 18. Perry Capital bought 5.5 million shares in the first quarter of 2012, possibly attracted to the combination of these two factors. Avon is exposed to an economic slowdown in Brazil, which recently passed the U.S. to become Avon's largest market, as well as in the U.S. Its beta is 1.4, somewhat rare for a company which returns so much cash to investors, and it is possible that it would cut its dividend if it ran into financial difficulties.
Reynolds American's, Lorillard's, and Altria Group's products don't quite smell as nice as Avon's to many investors: they are large-cap cigarette companies with high margins and excellent cash flow, which enables them to pay sizable, steady dividends to stockholders. All three also carry P/E multiples in the teens, so they are not necessarily overhyped or overpriced. So far this year, all three are up 10-20% as their business models stand strong in a U.S. economy that may be slowing down as consumers deleverage (and the dividend yield is probably welcome as well). Many investors might not want to own shares in a tobacco company, but several hedge funds think they are fine in moderation. Jim Simons's Renaissance Technologies reported owning 1.6 million shares of Lorillard at the end of March and Cliff Asness recently increased his position in Altria Group to 1.9 million shares.
Safeway runs over 1,700 grocery stores in the U.S. and Canada. It has very low margins, as with most grocery stores, but pays high dividends to its investors. As might be expected from the blandness of its industry, it has the lowest P/E ratio of any of these five companies (8) and trades at only seven times forward earnings estimates. It is therefore a stable consumer stock (a beta of 0.8) which also makes an excellent value stock and pays a high dividend for a consumer staple company. It also does not have any of the industry-related concerns facing investments in tobacco. Billionaire Ray Dalio's Bridgewater Associates increased its holdings of Safeway in the first quarter of the year to over 700,000 shares. We think investors in search of lucrative, reliable dividend checks should consider following Bridgewater's lead.