3 Stocks With 5% Yields

SmartMoney has a stock screen with believable yields of over 5%. 3 Stocks With (Believable) 5% Yields

A high dividend yield can signal that a company’s shares are a bargain or that trouble is looming. The job of the value investor is to tell the former case from the latter.

There’s no way to know for sure. Affordability measures, like the cost of the dividend divided by the amount of free cash flow, are no guarantee because healthy companies sometimes cut payments to afford acquisitions. However, by using such measures, investors can at least put the odds in their favor. There are other signs that dividends are safe, too. Recent sales growth is a sign that more prosperous days lie ahead, and a recent dividend increase beats management say-so as a judge of a company’s commitment to payments. Below are three companies with affordable-looking 5% yields and recent dividend and sales increases.

Verizon Wireless (VZ) - Dividend yield: 6.1%
Apple (AAPL) plans to produce an iPhone this year that could allow Verizon (VZ) and others to end AT&T’s (T) service monopoly for the gadget, The Wall Street Journal reported last week, citing anonymous sources briefed by the company. Expect Verizon to prosper either way. An iPhone partnership would bring a jump in sales, but only a stingy increase in profits, because carrier subsidies for the phone are the highest in the business and Apple doesn’t share its application sales with carriers. For the moment, Verizon enjoys wider profit margins than competitors, and free cash flow should swell this year as the company winds down spending on FiOS, its fiber-optic competitor to cable television.

Eli Lilly (LLY) - Dividend Yield: 5.4%
Like most of the big drugmakers, Eli Lilly (LLY) faces upcoming patent expirations. But as Jeffrey Holford of Jefferies and Company wrote to clients last month upon initiating coverage of the stock with a buy recommendation, Lilly is the “cheapest patent/cliff recovery play in the sector.” Shares trade at less than eight times this year’s earnings forecast, and the company has little debt, plenty of cash flow and a handful of promising drugs in its pipeline

Consolidated Edison (ED) - Dividend yield: 5.3%
Consolidated Edison (ED) transmits and delivers power to New York City and surrounding areas and has a rate structure that makes its returns highly predictable if slow-growing. Regulators recently agreed to allow the company to raise its rates by 12.6% over three years, which is less than management had asked for, but shares have nonetheless climbed since. The city’s jumble of wires and pipes is well more than a century old and provides ConEd with constant opportunities for investment, which the company in turn can use to bolster its appeals for rate hikes. Even assuming the stock price goes nowhere, the dividend yield reinvested is enough to double an investor’s money in a little over 13 years.

Disclosure: The Div Guy owns shares of VZ and T at the time of this post.

Finding a Few Good Dividend Stocks

Barrons has an interesting article by Teresa Rivas. She interviews Henry Sanders who is the fund manager of the Aston/River Road Dividend All Cap Value Fund. Finding a Few Good Dividend Stocks

Barrons.com: Obviously, this is a dividend-focused fund, but can you explain a little more how you narrow down potential investments?

Sanders: We have six critical criteria. In order of importance, the first is the dividend, and not just a nice dividend, but we like to see companies that have a history of raising the dividend. The second would be financial strength. The companies that are more leveraged we tend to stay away from because they are more apt to run into trouble and less apt to continue to be able to raise the dividend. Third, would be priced at a discount. We are a value shop so we place what we consider an absolute value on every stock we buy, which is akin to fair market value or something like that, a term others might use. That is based on ordinarily some kind of free cash flow multiple. We want at least a 10% to 15% discount off that figure.

The next one (criterion) would be attractive business model. We tend to like simple businesses we can understand, that have predictable, sustainable cash flow streams. Good shareholder orientation is next. Dividend policy is certainly a big part of that, share buybacks and high insider ownership. What is company management doing with those extra dollars of free cash flow? A number of studies have shown that companies that pay dividends do better over time than companies that don't pay dividends, and I think a lot of that is because they tend to be better stewards of the cash flow and they only pick the best projects, so again, good shareholder orientation really plays into that. The last one is undiscovered, underfollowed, misunderstood stocks. We have a small-cap background so in the small-cap space (maybe to some extent in the mid-cap space), that makes sense because there are companies that have very little, if any coverage. That gives us a leg up because 75% of our research is done in-house. When the market hates a company, that's the best time to get in it. If it is a stock that has a nice yield to it, it makes it a whole lot easier because then you are getting something positive out of it. Maybe you do have to hold it for a period before you start realizing some upside, but in the meantime you are getting paid to sit and wait.

Q: Anything new on your radar?

A: A Chilean brewer called Compania Cervecerias Unidas (CCU) is pretty new. It's the largest brewer in Chile, with a lot of additional drinks that they produce, and they are the largest bottled water producer as well. We started buying it before the earthquake hit actually [earthquake was in February], but they have managed to survive. From what I understand, there are several areas that have gotten pretty decimated in terms of manufacturing down there. But this business has held up very well. They just boosted their dividend a significant amount. The yield was relatively low, but they boosted it almost fourfold.

Q: Waste Management was your second-biggest holding, as of the end of February.

A: They have a couple of things going for them. In the past they were more intent in trying to grow revenue at the expense of margin, but they changed their philosophy and have concentrated more on just loosening their profitability instead, which is something we applaud completely. But the neat thing about that is, if an airline has a seat to sell, once the plane leaves the airport they can't sell that seat again. But with Waste Management, they own a lot of key landfill space. First, they are not making many new landfills, and secondly, if they don't sell that space today, they can sell it tomorrow at potentially a higher price. So the dynamics of that business model and the kind of predictability of waste is what we like. Even though people are trying to reduce waste, the company is in on the recycling side as well. It's just a very durable kind of business. Even in bad times, garbage is still generated.

Q: General Mills was another large name you own.

A: It's the second-largest cold cereal producer, after Kellogg (K). What's remarkable is that growing up, Kellogg just seemed to own the market. But I have three kids, and I looked in our cupboard the other day and we had maybe eight boxes of cereal and I think six of them were General Mills products. Cheerios is the largest cereal brand, which is theirs. The Cinnamon Toast Crunch, the stuff the kids love, they are all General Mills cereals, as is Chex and Wheaties. They have done a great job growing their business, and if you look at their charts since the downturn, the stock has done nothing but go up. It hit bottom at about $47 and it's up today -- I guess it's a little over $70. They raised their dividend twice last year, most recently 9% in July.

Q: Another food-oriented name is Sysco (SYY).

A: We first got into that in mid-December. It was a pretty dicey time. Who is going to be hurt because the consumers are cutting back? Well, it's going to be discretionary spending, and the No. 1 discretionary item is eating out. Sysco is the largest provider of products to restaurants. But they have over 400,000 customers, not just restaurants but hospitals, schools and hotels. They have this remarkable distribution system, and it's one of those things, like a moat like [Warren] Buffett talks about. They have had very stable operating margins between about a little over 4% and up to just a little over 5%. They have a really strong balance sheet and nice free cash flow. The stock is close to $30 now, but we still think it's pretty cheap because as the economy really recovers, a company like Sysco I would think would be on the front edge.

Q: Do you still like Procter & Gamble?

A: Historically, P&G yield has been around 1%, and it's always been pretty expensive. But in this downturn P&G's profits have held up really nicely, and they have continued to raise the dividend through this whole thing. So this downturn allowed us to get into it at a really good price. I'm probably not going to tell you anything new or exciting about P&G, but that's our angle.

Aston/River Road Dividend All Cap Value Fund (ARDEX)
Top 10 Holdings (as of February 28, 2010)
Waste Management WM
Cracker Barrel Old Country Store CBRL
Verizon Communications VZ
Spectra Energy SE
Sysco SYY
General Mills GIS
Clorox Company CLX
Automatic Data Processing ADP
McCormick & Company MCK
PepsiCo PEP
Source: Aston Funds, Morningstar

Disclosure: The Div Guy owns shares of PG, VZ, SE and PEP at the time of this post.

Top 20 Stock Holdings

Here are the top 20 stocks in my Dividend Portfolio as of 3/31/10 ranked by size of holdings. I know some if these stocks no longer pay dividends but I have keep them for gains as the economy recovers. I will look to sell my stocks that are no longer paying dividends throughout 2010.

1. Kinder Morgan Energy (KMP) USA
2. DCP Midstream Partners (DPM) USA
3. Barclays PLC (BCS) UK
4. HRPT Properties Trust (HRP) USA
5. Penn West Energy Trust (PWE) Canada
6. Procter & Gamble (PG) USA
7. General Electric Company (GE) USA
8. Johnson & Johnson (JNJ) USA
9. American Capital (ACAS) USA
10. ONEOK, Inc. (OKE) USA
11. Banco Santander (STD) Spain
12. Diana Shipping Inc. (DSX) Greece
13. Aircastle Limited (AYR) USA
14. Deutsche Bank (DB) Germany
15. GlaxoSmithKline (GSK) UK
16. Exxon Mobil Corporation (XOM) USA
17. Abbott Labs (ABT) USA
18. Pepsi (PEP) USA
19. Newell Rubbermaid (NWL) USA
20. Unilever NV (UN) Netherlands

Here are the top 10 holdings of the Invesco PowerShares Dividend Achiever Portfolio as of 4/5/10:

1. Procter & Gamble (PG) USA
2. Chevron (CVX) USA
3. Johnson & Johnson (JNJ) USA
4. AT&T (T) USA
5. Wal-Mart Stores (WMT) USA
6. Exxon Mobil Corporation (XOM) USA
7. IBM (IBM) USA
8. Coca Cola (KO) USA
9. Pepsi (PEP) USA
10. Abbott Labs (ABT) USA

March Dividend Income Update

My Annualized Dividend Income as of the end of March increased to $5,760 from $5,683 for the month. This means my dividend stocks will pay $5,760 in dividends over the next 12 months.

I made a few dividend stock purchases over the past month from dividend distributions. It looks like the economy has bottomed out and we had no more dividend cuts the last few months.

My Dividend Income Goal for the end of 2010 is $6,000. I plan to sell of some stocks that are no longer paying dividend throughout the year and add a few hundred dollars a month to our dividend paying stocks.

Most of my stocks are held in my Zecco Trading account and the rest are DRIPs. The dividends from my stocks are reinvested but I am keeping track of the amount of income I could receive once I retire or choose to receive the dividends in cash.

I will post my Top 20 Stock Holdings on Tuesday.

March Net Worth Update

As of the end of March our Net Worth increased to $817,000 from $795,239 for the month which is a 2.74% increase. The stock market has put together two good months and we are now at a high since May 2008's $826K. This is also close to where we were on April 2007.


The breakout is as follows:
ASSETS
Retirement Accounts $408,365
Taxable Accounts $137,403
Cash $21,926
Home $205,000
Cars $8,000
Personal Property $3,000
Kids 529 Accounts $33,306


Here is the summary for this month:

What a difference a year makes, this time last year everyone was in a panic about the stock market drop. I continued to purchase stock throughout 2009 and we now have a nice rebound. Our Net Worth increased the past month due to an increase in the stock market. We are still debt free since we paid off our credit card debt. We will continue to use our credit cards for rewards but payoff the balances each month. I received $568 in dividends for the month and have used the cash from these dividends to make additional stock purchases of our dividend stocks but I have not been adding much extra money.

We will be building up our cash over the next few months to increase our cash reserves. You can click on my Net Worth graph on the right to see the changes in each category from the previous month. I continued funding our Roth IRA's each month.

I will post my Dividend Income Update on Monday.