As US stocks kept hitting new all-time highs earlier this year, many investors shied away with concerns on valuations. Plus, ultra-low and even negative bond yields are signaling gloomy economic outlook and adding to the panic mode among equity investors.
Is the stock market no longer a good place to preserve and generate wealth at this point? Well, although no one is able to predict the future (in terms of market movement or economic development), investors can certainly optimize their investment decisions based on data.
Per CNBC, as of 8/13/2019, more than half of the S&P 500 (SPY) stocks offer dividend yields that beat 10-year U.S. Treasury bond (yielding around 1.65%). This means that the plunge in bond yields has left investors (especially income investors) with fewer alternatives to stocks. Some may argue that equities, unlike bonds, endure business risks that may cause a dividend cut, and hence, a lower yield then. On the one hand, this is, by all means, a valid point and why I think that investors should focus on quality especially when an economic storm is forming. On the other hand, assuming that businesses would do well, stocks have the flexibility of raising cash payouts - the upside that fixed-income investments do not offer.
Therefore, especially for those long-term investors who seek incomes, one place to look for to park their money could be those "high-yield" dividend growth stocks with strong business fundamentals.
I build the following recommendation list based on four criteria:
- "High-yield": a dividend yield of 1.7% or above (as of 8/14/2019), which is higher than that of the US 10-year treasury bond
- Dividend growth: growing annual dividend at both the 3-year CAGR and the 5-year CAGR of 10% or higher
- Dividend safety: a payout ratio of 70% or less
- Strong fundamentals: one of the 100 U.S. companies earning the highest Urbem Quality Scores
This approach gives me the 16 stocks as detailed below:
Texas Instruments (TXN)
Texas Instruments is a global semiconductor design and manufacturing company operating in more than 30 countries and serving about 100,000 customers worldwide. The stock has a 2.5% dividend yield, a 58% payout ratio, a 23.4% 3-year DGR, and a 19.7% 5-year DGR.
Automatic Data Processing (ADP)
With over 810,000 clients in 140 countries and territories, ADP is one of the world's leading providers of cloud-based human capital management solutions to employers of all sizes. The stock has a 1.87% dividend yield, a 62% payout ratio, an 11.9% 3-year DGR, and a 12.3% 5-year DGR.
MSC Industrial Direct (MSM)
MSC Industrial is one of the largest industrial equipment distributors in the world. The company is most famous for publishing "The Big Book", a catalog totaling over 3,000 pages detailing its products, which currently number over 1 million. The stock has a 4.38% dividend yield, a 49% payout ratio, a 13.3% 3-year DGR, and a 21.4% 5-year DGR.
TJX Companies (TJX)
The TJX Companies is the leading off-price retailer of apparel and home fashions in the U.S. and worldwide. The stock has a 1.72% dividend yield, a 36% payout ratio, a 22.6% 3-year DGR, and a 21.9% 5-year DGR.
Cisco is a multinational technology conglomerate that develops, manufactures, and sells networking hardware, telecommunications equipment, and other high-technology services and products. The stock has a 2.66% dividend yield, a 47% payout ratio, a 16% 3-year DGR, and a 20.2% 5-year DGR.
T. Rowe Price Group (TROW)
T. Rowe Price is a global asset management firm that offers funds, advisory services, account management, and retirement plans and services for individuals, institutions, and financial intermediaries, with assets under management of more than $900 billion at the end of 2018. The stock has a 2.8% dividend yield, a 41% payout ratio, a 10.6% 3-year DGR, and a 13.6% 5-year DGR.
Fastenal is the largest fastener distributor in North America, providing a wide range of selection of OEM, MRO, construction, industrial, and safety products. The stock has a 2.94% dividend yield, a 63% payout ratio, an 11.2% 3-year DGR, and a 14% 5-year DGR.
As a leading biotech company, Amgen discovers, develops, manufactures, and delivers various human therapeutics with a focus on areas of high unmet medical need. The stock has a 2.81% dividend yield, a 40% payout ratio, an 18.7% 3-year DGR, and a 22.9% 5-year DGR.
Oracle is the third-largest software company (by 2018 revenue), which sells database software and technology, cloud engineered systems, and enterprise software products. The stock has a 1.78% dividend yield, a 25% payout ratio, a 10.1% 3-year DGR, and a 25.9% 5-year DGR.
Broadridge Financial Solutions (BR)
Broadridge is the leading provider of investor communications (e.g., proxy statement, annual report, virtual annual meeting), technology-driven solutions, and data and analytics to the financial services industry. The stock has a 1.7% dividend yield, a 43% payout ratio, a 14.2% 3-year DGR, and a 16.9% 5-year DGR.
Altria Group is one of the world's largest producers and marketers of tobacco, cigarettes and related products, with additional holdings across alcohol and cannabis. The stock has a 6.84% dividend yield, a 79% payout ratio, an 11.4% 3-year DGR, and a 10.3% 5-year DGR.
OTC Markets Group (OTCQX:OTCM)
OTC Markets Group is a financial market providing price and liquidity information for almost 10,000 over-the-counter securities. To create better informed and more efficient financial markets, these securities are organized into three markets based on the quality and quantity of information companies disclose - OTCQX, OTCQB, and Pink. The stock has a 1.87% dividend yield, a 44% payout ratio, an 18.6% 3-year DGR, and a 27.6% 5-year DGR.
TD Ameritrade (AMTD)
TD Ameritrade is a broker that offers an electronic trading platform for the trade of financial assets, margin lending, and cash management services. The stock has a 2.7% dividend yield, a 32% payout ratio, a 14.5% 3-year DGR, and a 19.4% 5-year DGR.
Hormel Foods (HRL)
Hormel Foods is a food products company offering a wider range of packaged and refrigerated food brands, such as Applegate, Columbus Craft Meats, Dinty Moore, Jennie-O and Skippy, in 80 countries. The stock has a 2.01% dividend yield, a 47% payout ratio, a 14.5% 3-year DGR, and a 17.1% 5-year DGR.
PetMed Express (PETS)
PetMed Express is an online pharmacy that sells prescription and non-prescription pet medication and nutritional supplements. The stock has a 6.45% dividend yield, a 58% payout ratio, a 13.6% 3-year DGR, and a 10.2% 5-year DGR.
UnitedHealth Group (UNH)
UnitedHealth Group is the largest healthcare company (by 2018 revenue), which offers health benefits and services to people residing in all 50 states in the US and more than 130 other countries. The stock has a 1.73% dividend yield, a 28% payout ratio, a 22.5% 3-year DGR, and a 26.8% 5-year DGR.
As you can see above, the recommendation list covers a variety of industries (from industrial to retail to technology) as well as both large caps (over $200B) and small caps (below $500M). Their current dividend yields range from below 2% to over 6%, and dividend growth rates from low-teens to over 25%.
If bond yields continue to stay low (if not lower), I would bet that many of these candidates offer pretty good value, especially to income investors. Of course, investors should carefully examine and fully understand business economics before buying stocks, instead of acting purely on metrics, such as yield, ratio, growth rate.
What is your favorite "high-yield" stock at the moment? Feel free to comment below.
Disclosure: I am/we are long OTCM, MO. 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.
Additional disclosure: Mentioning of any stock in the article does not constitute investment recommendations. Investors should always conduct careful analysis themselves and/or consult with their investment advisors before acting in the stock market.