Everybody is on the hunt for higher yields. With a three-month
Treasury bill yielding 0.03%, way less than the rate of inflation,
and a ten-year Treasury yielding just 2.04%, barely more than
inflation, who can blame them?
And too many investors seem willing to add lots of risk in their
hunt for yield. Ten years is a long time to lock up your money in
even something as safe as a Treasury note if interest rates or
inflation go up. Buying a corporate junk bond might get you 5% or
6%, but these are the riskiest corporate debt out there. If the
economy stumbles, junk bonds will tumble.
If you're looking for higher yield and you don't want to sacrifice
safety, I think you're best bet is to look for dividend stocks from
solid companies. The payouts from a dividend stock go up over time
- unlike the fixed payouts from a bond - giving you protection if
interest rates rise.
And if you pick a company with a solid and growing cash flow from
its business, you're taking on much less risk than you would with a
junk bond. Best of all, if you dig real hard, you can find stocks
paying dividends of 3%, 4%, 5%, and even occasionally 6%.
Here are my ten favorite low-risk, high-dividend stocks.
Bank of Nova Scotia
This is the third largest of Canada's six major banks. (Together,
the six hold 90% of Canada's bank assets.) And it is by far the one
with the most exposure to emerging markets in Latin America and
Asia, although the bank by has by no means neglected its Canadian
market in recent years. In the last year, Bank of Nova Scotia,
better known as Scotiabank, bought ING DIRECT Canada to add 2
million Canadian accounts, and acquired a 51% stake in Banco
Colpatria in Colombia.
Customer headcount comes to 8 million in Canada and 11.5 million
internationally. The mix gives Bank of Nova Scotia exposure to
faster growth in emerging markets, as well as the stability of a
big deposit base in the highly regulated Canadian market.
The bank has grown dividends by 4.6% per year over the last five
years. Standard & Poor's gives Bank of Nova Scotia an A+ credit
With General Electric, you're sacrificing some yield today for the
promise of more yield tomorrow.
After cutting its dividend during the financial crisis, thanks to
GE Capital's neck-deep exposure to the mortgage crisis, the company
has gradually rebuilt its dividend from a quarterly $.10 per share
in 2009 to $.19 per share in 2013 -- and there's more on the way.
The company has said it will spend $18 billion in cash on
shareholders in 2013, with most of that ($10 billion) going to
Revenue from the company's industrial segment is projected to climb
by 5% to 10% this year, with margins climbing an estimated 0.7
percentage points. General Electric plans to gradually shrink GE
Capital until it represents about 30% of company earnings.
Standard & Poor's gives General Electric an AA+ rating. General
Electric is a member of my Dividend Income portfolio.
Holly Energy Partners
Holly Energy Partners is a master limited partnership spun off by
) in 2004. Assets include 2,600 miles of pipelines, 12 million
barrels of storage, and oil terminals in the West and Southwest.
This is a very low-risk MLP, because almost 100% of its revenue
comes from fees with built-in inflation matching (as opposed to
contracts with prices based on commodity prices), and because Holly
Energy assets are focused near such prime areas of the US
midcontinent oil boom as the Permian Basin of Texas.
Distributions climbed 6.7% in the first quarter of 2013 from the
first quarter of 2012. The five-year average annual increase in
distributions has been 5.31%.
Master limited partnerships are tax-advantaged vehicles best owned
outside a retirement account. (Part of the annual distribution is
treated as a return of capital, and is not taxed until you sell the
Once upon a time, technology companies didn't pay dividends. Now
Intel and others such as
(CSCO) do. (Microsoft's yield is 2.66% and Cisco pays 2.91%.) Call
it a clear sign that these erstwhile tech rockets have become
But something interesting has developed in the way that Intel plays
the dividend game: The company not only pays a higher yield than
other technology companies, but it has also been very aggressive in
increasing its dividend during periods when the share price has
climbed, so that the yield stays above 3%.
Intel's five-year annual rate of dividend growth is a huge 12.82%.
That puts it ahead of consumer dividend plays such as
Procter & Gamble
(PG), which shows a hefty 9.55% annual growth rate in its dividend
over the last five years.
I think part of that reason is that the company sees itself going
through a tough transition from the PC-centered world its chips
dominate to a world dominated by smartphones and tablets. Intel has
turned its powerful manufacturing engine to catching up with such
new paradigm leaders as
The release of Intel's Atom chip using 22-nanometer manufacturing
this year (and 14 nanometers in 2014) will help close the gap for
Intel on energy efficiency. But this is a long-term battle.
Fortunately, Intel is good at those.
Standard & Poor's gives Intel an A+ credit rating. Intel is a
member of my Dividend Income portfolio.
Kinder Morgan Energy Partners
This master limited partnership is in expansion mode, thanks to the
acquisition of El Paso by
(KMI), the owner of Kinder Morgan Energy Partners. This has
resulted in a pipeline of asset dropdowns that are headed to KMP
over the next few years.
Kinder Morgan Energy Partners spent $1.8 billion on growth in 2012,
and its capital budget for acquiring natural gas pipelines in 2013
runs to $2.9 billion. This puts KMP in the sweet spot in a
financial market awash with cheap money: Raise cheap capital, buy
assets, increase distributions - and repeat.
Kinder Morgan's average annual rate of growth for distributions has
been 7.1% over the last five years. (Again, MLPs are tax-advantaged
vehicles best owned outside a retirement account.)
Standard & Poor's gives Kinder Morgan Energy Partners a BBB
credit rating. Kinder Morgan Energy Partners is a member of my
Dividend Income portfolio.
Master limited partnership ONEOK has stumbled recently-which is why
you can get a 5.36% yield on this normally very stable dividend
The culprit was a shrinking spread in natural gas liquids, as a
result of soaring supply of these liquids due to the boom in
midcontinent US energy production. (ONEOK gets more of its revenue
from transportation, where prices are linked to commodity prices,
than does a competitor such as
Targa Resources Partners
I think you'll have to be patient with ONEOK, since the squeeze in
spreads for natural gas liquids is likely to continue through much
of 2013. That will lead to a temporary slowdown in the growth of
distributions...but I think you can count on a gradual pickup from
the 6.3% annual average growth rate of the last five years.
Morningstar gives ONEOK a BBB credit rating. ONEOK is a member of
my Dividend Income portfolio.
This is by far the riskiest stock or master limited partnership on
the list. By leveraging each rig it completes to finance
construction of the next rig, SeaDrill has grown from 11 rigs in
2005 to 50 at the end of 2011, with another 18 under construction.
Not only has SeaDrill become the owner of the second largest deep
sea drilling fleet in the world, next to
(RIG), but it has also become the owner of one of the newest and
most advanced fleets in the industry. That lets SeaDrill collect
the highest day rates for its fleet.
By pledging its existing rigs to raise debt to finance new rigs,
SeaDrill has severely reduced its flexibility in any industry
downturn. Because it needs the revenue from its rigs, SeaDrill
wouldn't be able to stack them in a downturn, and would have to
keep them in operation by cutting prices. That, in turn, could make
any downturn worse.
At the moment there's no downturn in demand for deep sea drilling
rigs in sight, but this leverage is certainly something to keep in
Morningstar gives SeaDrill a B credit rating. SeaDrill is a member
of my Dividend Income portfolio.
Targa Resources Partners
Targa is in the right place at the right time to take advantage of
the midcontinent boom in the US production of natural gas liquids,
a key feedstock for the chemical industry. This master limited
partnership has just made its first acquisition in the Bakken,
adding an oil pipeline to its natural gas liquids focus.
The US energy boom has put the squeeze on the price of natural gas
liquids (see ONEOK), but fortunately for Targa and its investors,
the company gets a relatively high 46% of its revenue from
fee-based services, where prices don't depend on commodity spreads.
(Targa projects that it will expand its fee-based business to 55%
of revenue by the end of 2013, and to 65% by the end of 2014).
Distributions have grown at an average annual rate of 12.5% over
the last five years. Morningstar gives Targa a B+ credit rating.
Targa Resources Partners is a member of my Dividend Income
Westpac is one of just four banks that control the Australia/New
Zealand banking market. In the first half of 2013, return on equity
grew to 16.1%, and revenue rose by 5% from the first half of 2012.
Net interest margins rose 1 basis point, a good performance in the
current low interest rate environment, and impaired assets as a
percentage of total non-securitized loans fell to 0.83% from 0.94%.
The Australian economy has slowed lately leading to interest rate
cuts from the Reserve Bank of Australia. That could put pressure on
net interest margins, and on bad loan ratios.
The bank has grown dividends at an average annual rate of 8.2% over
the last five years. Westpac Banking is a member of my Dividend
I've left this one for last, because it is a classic old-time
dividend growth pick. The yield isn't all that high, but the
company has paid a dividend every year since 1887.
In 2009 it froze the dividend, breaking a 33-year record of
increasing the dividend each year. Because of that freeze, these
shares don't show up in most dividend growth screens, which look at
the last five years...but the company's 7.9% average annual rate of
dividend growth since 2009 is what you'd expect from a company with
a very long-term commitment to dividend growth.
The company has three main businesses-auto interiors, building
energy efficiency, and auto batteries, which give it - usually - a
very stable cash flow. Standard & Poor's gives Johnson Controls
a BBB+ credit rating. Johnson Controls is a member of my Jubak's
Editor's Note: This article was written by Jim Jubak of
Westpac Banking is a member of Jim Jubak's Dividend Income
For a full list of the stocks in the Jubak Global Equity fund
as of the end of March, see the fund's portfolio
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