Investors chasing high yields have limited options to invest in high-quality stocks that pay high and sustainable yields. The Mergent Dividend Achievers 50 Index, a subset of the U.S. Broad Dividend Achievers Index, focuses on 50 highest yielding stocks that meet Mergent's indexing requirements. All 50 stocks are dividend-paying companies with a history of increasing dividends for at least ten years. All index members have daily trading volumes in excess of $500,000. However, it should be noted that high yields of many index constituents reflect higher risks associated with the nature of the company's business operations.
The Mergent's Dividend Achievers 50 Index pays a dividend yield of 4.7%. Its combined dividends grew at an average rate of 4.5% per year over the past five years. The index is predominantly concentrated in the utilities sector. Over the past 12 months, the index outperformed its main benchmark, Russell Midcap Value, by a margin of 11.3 percentage points. Nevertheless, over the longer investment periods, its performance was subpar. The PowerShares High Yield Equity Dividend Achievers Portfolio ETF (PEY) attempts to replicate the index's performance. For investors interested in specific high-yield stocks, here is a closer look at seven of the largest holdings in the high-yielding Mergent Dividend Achievers 50 Index.
Pitney Bowes (PBI) is the world's largest seller of postage meters. It pays the highest yield among the S&P 500 Dividend Aristocrats. The company's dividend yield is 11.2% and its payout ratio is at 44%. Pitney Bowes' rival Neopost SA is closely held, while competitor Xerox (XRX) pays a dividend yield of 2.3%. Over the past five years, Pitney Bowes' EPS contracted at a rate of 7.1% per year, while its dividends grew at an average annual rate of 2.7%. Many investors challenge the sustainability of the company's business model. Large declines in the stock price have swelled the yield to the currently exaggerated level. Many see the stock as a value trap. The stock has a free cash flow yield of 14.4% and ROIC of 21%. The stock's P/E is at 6.7, compared to 10.7 for its industry on average and 14.6 as its five-year average. Fund manager Philippe Laffont (Coatue Management) holds an $18.5 million stake in the company.
Vector Group Ltd. (VGR) is a cigarettes maker, producing the brands of Eve, Pyramid, and USA. Its dividend yields 9.4% on a payout ratio of 667% of trailing earnings. The company has sustained dividend payouts well in excess of its earnings or free cash flow for years. Vector Group's peers Lorillard (LO) and Reynolds American Inc. (RAI) pay dividend yields of 4.9% and 5.1%, respectively. Over the past five years, the company's EPS grew at an average rate of 10.7% per year, while dividends increased at an annual rate of 5.0%. Analysts forecast that Vector Group's EPS will expand at a rate of 11.0% per year for the next five years. Vector Group has an ROA of 1.3% and ROIC of 5.4%. Its current P/E is at 62.5, compared to 17.1 for the industry on average and 23.9 as the stock's five-year average. Billionaire Jim Simons holds $68 million in this stock.
Old Republic International Corporation (ORI) is an insurance underwriter in the United States and Canada. Its dividend yields 8.2%. The company has been operating at a loss for the past two years. Its peers First American Financial Corporation (FAF) and The Travelers Companies (TRV) pay dividend yields of 1.7% and 2.8%, respectively. Over the past five years, Old Republic's EPS contracted sharply at an average rate of 30% per year, while dividends continued to increase consistently at an annual rate of 2.7% per year. Analysts forecast that the firm's EPS will grow at an average rate of 8.0% per year for the next five years. The stock has a low free cash flow yield and a negative ROE of 2.5%. The company is expected to return to profit in the next 12 months. Fund manager Alan Fournier (Pennant Capital Management) and Michael Blitzer (Kingstown Capital Management) are the buyers of the stock.
People's United Financial (PBCT) is the largest regional bank in New England. It pays a dividend yield of 5.3% on a payout ratio of 101% of trailing earnings. The bank has been typically paying more in dividends than its earnings. Its competitor Bank of America (BAC) pays a dividend yield of 0.5%, while its rivals RBS Citizens Financial Group is a wholly-owned subsidiary of the Royal Bank of Scotland (RBS), which does not pay dividends. Over the past five years, EPS and dividends of People's United Financial grew at average rates of 6.8% and 4.7% per year, respectively. Analysts forecast that the bank's EPS will grow at an average rate of 10.7% per year for the next five years. The bank has a free cash flow yield of 3.9%, ROE of 4.2%, and ROIC of 3.9%. The bank has very little debt relative to equity. The stock is trading below book value at a price-to-book ratio of 0.8, which compares to a price-to-book ratio of 1.0 for its respective industry and 1.1 as its five-year average. In the second quarter, the stock was a new addition to Jim Simons's portfolio.
Leggett & Platt Inc. (LEG) is a diversified producer of residential furnishings, commercial fixturing and components, industrial materials, and specialized components (such as automobile seat frames, etc.). It is also the second highest-yielding dividend aristocrats. The stock pays a dividend yield of 4.9% on a payout ratio of 105% of trailing earnings and 68% of last year's free cash flow. Its competitor Tempur-Pedic International (TPX) does not pay dividends, while rival Genuine Parts Company (GPC) pays a dividend yield of 3.1%. Over the past five years, Leggett & Platt's EPS contracted at an average annual rate of about 4% per year, while its dividends grew at an average annual rate of 10.2%. Analysts forecast that the company's EPS will expand at an average rate of 15% per year for the next five years. The stock has a free cash flow yield of 4.3%, ROE of 11.6%, and ROIC of 7.6%. Its P/E is 21.5, on par with that for its respective industry. The stock's five-year average P/E is 30.4. Billionaire Steven Cohen is one of the smaller investors in the stock.
Avon Products Inc. (AVP) is a beauty and consumer care products company. It pays a dividend yield of 6.0% on a payout ratio of 161% of trailing earnings and 105% of free cash flow. The company's competitor Estee Lauder (EL) yields only 0.9%, while Inter Parfums (IPAR) has a dividend yield of 1.9%. Over the past half decade, Avon Products' EPS and dividends increased at average rates of 2.4% and 4.7% per year, respectively. Analysts forecast that this consumer care products maker will see, on average and at best, a flat EPS growth for the next five years. There are major risks regarding the sustainability of the company's dividend. Moreover, the stock has a bearish outlook, about which we wrote earlier. Avon Products' P/E is at 26.5, which compares to the P/E of 19.9 for its industry and 20.4 as its five-year average. Fund manager Phill Gross (Adage Capital) holds a $51-million position in this stock.
Mercury General Corporation (MCY) is primarily an auto insurance company. It pays a dividend yield of 6.4% on a payout ratio of 93%. Its main competitors are State Farm and Farmers Insurance Group, a subsidiary of Zurich Financial Services (ZFSVF.PK). Another competitor is The Allstate Corporation (ALL), which pays a dividend yield of 2.4%. Over the past five years, Mercury General saw its EPS shrink at 2.3% per year, while its dividends grew at an average rate of 4.0% per year. The company's EPS is forecast to rebound in the next five years, growing on average 6.7% per year. The stock has a ROE of 7.7% and ROIC of 7.2%. Its current P/E of 14.6 compares to the average industry P/E of 12.4. Chuck Royce (Royce & Associates) and Jim Simons hold small positions in this financial stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.