While the stock market has bounced back strong this year
following a difficult 2011, investors still aren't exactly pouring
into stocks. In fact, many continue to flat-out avoid equities.
Except, that is, for at least one part of the market: dividend
stocks. In a recent article for The Wall Street Journal, Jason
Zweig noted that so far this year, investors have put a net of $9
billion into mutual funds and exchange-traded funds that focus on
US stocks that pay stable, high, or rising dividends (Zweig cited
fund flow data from EPFR Global). Over the same period, investors
had removed a net of $7.3 billion from all other US stock
Zweig cautioned investors, saying it seems that many may be
rushing into dividend stocks for the wrong reasons -- either
because, with bond yields so low, they're looking for an easy way
to replace income in their portfolios, or simply because dividend
stocks did well last year. The latter are playing the
ever-dangerous game of performance-chasing; the former may be
ignoring the fact that, unlike with bonds, you don't necessarily
get your capital back when you buy a dividend stock. (And that's
more likely to happen if you buy them when they've gotten too
popular and overvalued.)
I think Zweig is wise to express caution. Rushing blindly into
high-dividend stocks because they did well last year is not good
investing, nor is buying them simply because they have a high yield
-- sometimes, the dividend yield will be high because the price of
the stock is very low, and low for good reason (i.e., the firm is a
dog and its shares are going nowhere). And, after all, what's the
point of getting a high dividend payment if the stock costs you
money by performing poorly?
So, if you're going to look for income through stock dividends,
you need to make sure that -- as with any stock you buy -- the
stock's fundamentals are strong and the company's balance sheet is
solid. With that in mind, I recently used my Guru Strategies (each
of which is based on the approach of the different investing great)
to find some stocks that not only have high dividend yields, but
also have attractively priced shares and solid financials. I found
a number that fit the bill, and are good candidates not just for
steady income but for capital appreciation as well. Here are some
of the best of the bunch.
Total S.A. (
This Paris-based oil and gas giant has operations in more than 130
countries. The firm has a $114 billion market cap has taken in
about twice that in sales over the past 12 months.
Total gets approval from my James O'Shaughnessy-based model.
When looking for value plays, O'Shaughnessy targeted large firms
with strong cash flows and high dividend yields. Total certainly
has the size, plus it is generating $11.06 in cash flow per share
(more than eight times the market mean), and it has a dividend
yield of 6.3%.
My Peter Lynch-inspired model also likes Total. While Lynch
liked companies with high earnings growth, he would invest in
slower-growing firms if their valuation and dividend yield were
good. Total has been growing earnings per share at a rate of only
about 1.5% over the long haul (I use an average of the three-,
four-, and five-year EPS figures to determine a long-term rate),
but it trades for just 6.7 times earnings and has that 6.3% yield.
So when we divide that P/E by the sum of its growth rate and yield,
we get a yield-adjusted P/E-to-growth ratio (the P/E/G is a
valuation metric Lynch pioneered) -- of just 0.85, which comes in
under this model's 1.0 upper limit.
AstraZeneca PLC (
Based in London, AstraZeneca is one of the world's largest
drugmakers. The $57-billion-market-cap firm is active in more than
100 countries, and makes a variety of well-known medications.
AstraZeneca is another favorite of my Lynch and O'Shaughnessy
models, in part because of its stellar 6.3% dividend yield. The
Lynch-based approach likes its solid 17.3% long-term growth rate
and sparkling 0.26 yield-adjusted P/E/G, as well as its reasonable
40% debt/equity ratio. The O'Shaughnessy-based model likes the
firm's size, $9.83 in cash flow per share, and that hefty
Paychex, Inc. (
New York State-based Paychex offers services that include payroll
processing, retirement services, insurance, and human resources,
and has more than 100 offices across the U.S. The
$11-billion-market cap firm gets high marks from the strategy I
base on the approach of the great Warren Buffett.
My Buffett-based model looks for firms with lengthy histories of
earnings growth, manageable debt, and high returns on equity (which
is a sign of the "durable competitive advantage" Buffett is known
to seek). Paychex delivers on all fronts. Its EPS have increased in
all but two years of the past decade; it has no long-term debt; and
its 10-year average ROE is an impressive 31.8%.
Public Service Enterprise Group Inc. (
New Jersey-based PSEG is an integrated power generation company
with assets in New York, New Jersey, Connecticut, and Pennsylvania.
It is involved in the nuclear, coal, gas, and oil arenas. About
half of the energy it produces is nuclear, which may be part of why
the stock is a bargain -- the tragedy in Japan had a
guilt-by-association impact on many nuclear power firms.
PSEG gets strong interest from my Lynch model. The firm has been
growing EPS at a moderate 10.9% rate over the long haul, and in
combination with its 10.7 P/E and 4.8% dividend yield, that makes
for a 0.68 yield-adjusted PEG, a good sign. It also has a
debt/equity ratio of about 80% -- which, for a utility, is very
good (its industry average is over 130%).
Southern Copper Corporation (
In addition to copper, this Arizona-based firm also produces
molybdenum, zinc, lead, coal, and silver. All of its mining
facilities are located in Peru and Mexico; the firm's exploration
activities take place in those two countries, as well as Chile.
Southern Copper ($26 billion market cap) gets high marks from my
Lynch-based strategy. The firm has grown EPS at an 8.6% pace over
the long haul -- not exactly gangbusters, but when you consider its
dividend yield of 6.6% and its 11.4 P/E ratio, the stock is trading
at a very reasonable yield-adjusted PEG of 0.75. Southern also has
a debt/equity ratio of 68.4%. That's good enough to come in under
this models 80% threshold, another good sign.
I'm long PAYX, TOT, AZN, and SCCO.