Parking Cash In The Large Cap 5% Dividend Club

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Includes: ABBV, BP, GSK, KHC, T
by: Steven Fiorillo
Summary

My 5% dividend club among large caps consists of AT&T, BP PLC, GlaxoSmithKline PLC, AbbVie Inc. and Kraft Heinz Co.

These five companies also pay their dividends at different times generating income every month throughout the year.

The combination of these five companies offers diversification and an overall effective forward yield which exceeds 5%.

If you're looking for an investment idea how about parking some cash among a diversified group of large cap stocks that each yield over 5% in dividends. Having a section of your portfolio dedicated to dividend stocks can provide protection in volatile markets and generate an additional income stream. If you have time on your side, reinvesting the dividends so they compound is a powerful tool which can pay off in spades down the road. I prefer large cap companies with solid financials since this is a long-term strategy. My 5% dividend club among large caps consists of AT&T (T), BP PLC (BP), GlaxoSmithKline PLC (GSK), AbbVie Inc. (ABBV) and Kraft Heinz Co. (KHC). If you were to purchase an even amount of shares between each of these five companies, your forward yield would exceed 5%.

Industry Company Name Ticker Market Cap in Billions Share Price Annual Dividend Yield
Telecommunication Services AT&T Inc. T $221.80 $30.47 $2.04 6.70%
Oil, Gas & Consumable Fuels BP PLC BP $142.80 $42.29 $2.46 5.82%
Pharmaceuticals GlaxoSmithKline PLC GSK $102.40 $41.24 $2.39 5.79%
Biotechnology AbbVie Inc. ABBV $121.60 $80.52 $4.28 5.29%
Food Products Kraft Heinz Co. KHC $58.10 $47.62 $2.50 5.25%

(Source: Steven Fiorillo) (Data Source: TD Ameritrade)

Generating monthly income from the 5% club

I have structured my personal dividend portfolio to generate income on a monthly basis. By coincidence these five companies also pay their dividends at different times, generating income every month throughout the year. If you were to purchase 100 shares of each company, your initial investment would be $24,247 and you would generate $1,335.97 in dividends throughout the year. This figure doesn’t take into consideration compounding the dividends over the course of the year. The main reason why I created a dividend portfolio which pays dividends on a monthly basis is to supplement my income when I retire. I will continue to reinvest the dividends, then when I retire take the cash disbursements. If you look at the image below, I used TD Ameritrade’s income estimator to illustrate the dividend payouts of these stocks. If you have a TD Ameritrade account, you can play around with share amounts and create a portfolio to see when your dividends will be paid.

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(Source: TD Ameritrade)

I love getting a raise how about you?

When I see an organization increase their dividend distribution, it indicates that the company is financially sound. The organization has created a multiyear budget and projection which indicates that they can afford to reward their shareholders with larger distributions from their profits. I love when companies I have invested in increase their dividends because I am essentially getting a raise without working for it. When I add a dividend stock to my portfolio, I look to own it for the long haul and I will reinvest all of the dividends. Increases in these distributions are beneficial to shareholders because through compounding of these distributions the quarterly payouts continue to increase. Of the stocks on this list, T has the longest history of giving increases to shareholders with their dividend growing on an annual basis for 34 consecutive years followed by ABBV and KHC with 6 consecutive years, then GSK and BP with 1 consecutive year of dividend growth. As GSK and BP start to grow their dividends again, this list of five large caps with yields exceeding 5% should provide sustainable and growable income to any portfolio.

So how safe are these dividends?

I always look through the numbers to see if the company can not only sustain the dividend but also if they have room to increase the dividend over time. The payout ratio is the initial component that I look at to make sure that there is a significant cushion between the EPS and the dividend payout. After I make sure that this number meets my standards, I look at the companies' financials to see if the EPS and revenues are increasing to make sure the business has future forward growth.

T comes in with a payout ratio of 56.9% which is absolutely stellar. At 56.9%, there is more than enough room to reward shareholders and keep the streak of 34 consecutive years of dividend growth going.

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(Source: Seeking Alpha)

Next, we have ABBV which has a dividend payout ratio of under 50%. Just less than half of their current earnings are distributed to their shareholders. With 6 years of consecutive payouts and such a low payout ratio, there is no reason why they wouldn’t continue this pattern. Their future drug pipeline should also provide considerable revenue increases in the future as their portfolios in Immunology and Oncology is quite immense.

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(Source: Seeking Alpha)

BP has a bit of a higher payout ratio at 75.98%, but this still offers potential growth and a nice safety net before BP has to go outside of their earnings to cover the dividend. BP is in an interesting space since fossil fuels have been under attack recently. By the year 2040, the global population is expected to grow by an additional 1.8 billion individuals to 9.2 billion people from the current level of 7.4 billion. By 2040, the global GDP is also expected to double while the middle class is expected to grow by approximately 80% by 2030 and reach more than 5 billion people. These factors are expected to drive the global energy demand by roughly 25% by 2040. An additional 25% added to the global energy demand is equivalent to adding another North and Latin America to the current demand of energy. As the global demand for energy increases, BP should be able to continue their turnaround of increased revenues and at the very least maintain their dividend.

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(Source: Seeking Alpha)

KHC has a payout ratio of 67.82% which leaves considerable room for dividend growth. KHC is in a similar situation as BP with the theory around the global population increasing. KHC should be able to recognize increased revenue as the US population increases since there will be more mouths to feed. KHC has many different staples in their portfolio which makes them a great defensive play with a safe dividend.

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(Source: Seeking Alpha)

Last but not least is GSK with a payout ratio of 67.73%. Just like the other four, GSK has more than enough room to increase their dividend as the years progress. Their business model is broken down to prescription medicines, vaccines and consumer healthcare products. Their pipeline should fuel their EPS and continue to reward shareholders as the quarters pass by.

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(Source: Seeking Alpha)

Conclusion

If you’re looking for a place to park cash and earn a healthy return, these five companies provide interesting opportunities. The combination of the five offers diversification and an overall effective forward yield which exceeds 5%. I am a huge fan on monthly income generated from stocks and this combination of large caps checks this box off as well. While these companies may not be as exciting as growth stocks, they generate generous dividends which can be reinvested to increase the rate of return on your investment. Depending on your future timeline, buying and stashing these stocks away for 10-20 years could provide an excellent source of income in your retirement years. At 37, I am building a portfolio of dividend stocks that I am comfortable holding for the long haul. Unless something changes with these companies, I would have no issues holding them for the next 30 years and let the dividends reinvest. I am currently a shareholder of BP and T, and I will be looking to start positions in GSK, ABBV and KHC in the future.

Disclosure: I am/we are long T, BP, GSK, KHC, ABBV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.