Dividend Stocks Add $6.4B in Q1
Dividend stocks are off to a great start this year after the first quarter of 2009 marked what could have been the worst period in history for income-oriented investors who look for stocks with big dividend yields. The cuts of last year have been replaced with hefty boosts to dividends for many blue chip stocks.
In February, media conglomerate Time Warner (TWX) hiked its dividend 13%. Among retail stocks, Walmart (WMT) boosted its dividend 11% at the beginning of March. In health care, Abbott Laboratories (ABT) raised its payout 10%. Consumer staples stocks like Kimberly-Clark (KMB) have also raised dividends by 10% or more.
The list goes on. In fact, Standard & Poor’s announced that only 48 companies decreased their dividend payments during the first quarter of 2010, a vast improvement over the record 367 companies that slashed dividends during the same period in 2009.
The S&P also reported that 399 companies boosted dividends during the first quarter of 2010, adding $6.4 billion to the dividend rate across the market. Compared with last year’s record $43.8 billion drop in dividend payouts, the turnaround is simply stunning.
Looking forward, Standard & Poor’s expects continued strength for dividends as stability returns to Wall Street and the jobs picture improves. However, the company said it may take until 2013 or later until dividends return to their 2007 peak. In the first quarter of that year, while the Dow was continuing its steady march to an all-time high of more than 14,000, 740 companies raised their dividends, and only 19 companies decreased them.
Here, then, are 10 of my Top Dividend Stocks to Buy Now.
7 Safe, High-Yielding Dividend Stocks
Providing for your retirement doesn’t just have to involve buying and selling stocks and socking away the cash. A great way to supplement your income is with reliable, high-yield dividend stocks that provide a regular payday. And if you invest wisely, on top of these dividends you’ll also see your shares appreciate and deliver capital gains over the long term.
By planting the seeds of high dividend stocks in your portfolio, you’ll be able to harvest some nice regular paychecks from some of the top companies on Wall Street.
Here are seven of my favorite top dividend stocks right now. Keep reading for my other three top picks…
Top Dividend Stock #1: Total (TOT)
Though there’s a lot of bad press right now for the energy industry in the wake of the tragic Gulf Coast oil rig disaster, that shouldn’t scare you off oil stocks in general. And for my money, one of the best on the market is European giant Total (TOT). Total is France’s largest oil company (and the world’s fifth largest), and TOT runs a “totally” integrated business, from exploration and production to refining, petrochemicals and marketing. In addition, Total has interests in coal mining, power generation and new-age energy sources such as solar, biomass and nuclear. In a nutshell, as long as folks use energy, then Total will be in business. TOT consistently replaces more than 100% of the reserves it pumps out of the ground, while carrying a modest debt load. The 6% dividend yield will warm your heart, too – it’s actually higher than the interest coupon TOT is paying on its latest bond issues.
Top Dividend Stock #2: Johnson & Johnson (JNJ)
Johnson & Johnson (JNJ), which reaped a windfall February 1 when rival Boston Scientific agreed to pay JNJ subsidiary Cordis $1.7 billion to settle a patent-infringement case, had been steadily on the rise for several weeks – until the recent market speed bump caused by the Greek debt drama. Trading at half the price-earnings ratio it fetched a decade ago and throwing off a plump +3% dividend, the stock is remarkably cheap for one of the world’s strongest and safest businesses. JNJ boasts a triple-A credit rating from Standard & Poor’s, a distinction shared by only three other U.S. industrial firms. This is a great low-risk dividend play, especially since the Johnson & Johnson dividend saw a boost at the end of April.
Top Dividend Stock #3: Merck (MRK)
In 2009, Merck (MRK) absorbed rival Schering-Plough, opening the way for the combined enterprise to cut costs and concentrate its research efforts on the most promising medicines in the pipeline. Earnings per share touched a new all-time high in 2009 and will likely progress another 20% or so over the next two years as the merger savings kick in. Surprisingly, perhaps, MRK never slashed its dividend during the Vioxx crisis and may, at last, be poised to sweeten the payout sometime within the next 12 months. MRK’s current yield is around 4.5%. By 2013, based on the company’s cash-generating potential, I project a total return of 55%-75% even if the overall market goes nowhere.
Top Dividend Stock #4: Exelon Corporation (EXC)
Exelon Corporation (EXC), the nation’s largest owner-operator of nuclear power plants, stands to benefit from increasingly stringent limits on carbon emissions in the years ahead. At the moment, electricity demand is down, depressing wholesale power prices. (EXC earns about 70% of its profits from sales to other utilities.) Thus, I expect the company to report a modest dip in 2010 earnings. However, a rebound is likely in 2011 – and the stock is very cheap at less than 12x this year’s trough earnings. As recently as mid-2008, EXC sold for 22x net, so you’re getting a 45% discount off the peak valuation. EXC’s current yield is around 5% – and safe. Even at this year’s low run rate, profits cover the dividend by a comfortable 1.8x.
Top Dividend Stock #5: Kimberly-Clark (KMB)
Paper products giant Kimberly-Clark (KMB) has increased its dividend for the last 38 years, making it one of the most reliable dividend stocks on Wall Street. With brands such as Kleenex, Scott, Huggies, Pull-Ups, Kotex and Depend, Kimberly-Clark holds No. 1 or No. 2 share positions in more than 80 countries. With a respectable 4% yield, KMB is a great dividend stock. But don’t think that’s all Kimberly Clark has to offer – shares have provided an average annual return of 3.9% over the past decade. Not bad considering the market’s antics.
Top Dividend Stock #6: Kinder Morgan Energy Partners (KMP)
As the nation’s largest publicly traded pipeline partnership, Kinder Morgan Energy Partners (KMP), owns nearly 30,000 miles of pipeline carrying natural gas, petroleum products and chemicals, together with about 180 terminals for bulk materials (such as coal) and liquids. I tend to favor pipeline MLPs, with their stable cash flows and healthy growth prospects. Since 1997, KMP has compiled a superb record. Cash distributions per unit have soared about 16 cents each quarter back then to $1.07 in 2010. With income like that, the capital gains take care of themselves. An investor who bought at then end of 1996 would have gotten a return of 27% annually! KMP is currently yielding almost 7%.
Top Dividend Stock #7: PepsiCo (PEP)
Why Pepsi instead of Coke? PepsiCo (PEP) has done a far better job of growing its business. In contrast to its bigger rival, PEP has reaped huge rewards from its efforts to diversify beyond soft drinks into snacks (Frito-Lay), sports drinks (Gatorade), fruit juices (Tropicana) and breakfast foods (Quaker). Sometimes, when you’re #2, it pushes you to “try harder,” as the old Avis commercials used to say. At Pepsi, trying harder has paid off handsomely for shareholders over the long run. The stock pays an attractive 3% dividend yield, which the company has sweetened 37 years in a row.
Obama’s Tax Policy to Boost These Dividend Stocks
President Obama’s 2011 budget takes an unexpected direction on taxes. Yes, the top tax on ordinary income (wages and interest) will jump to 39.6%, from 35% currently. I’m not happy about that, but the same rate applied under Bill Clinton – and the economy survived.
Of greater consequence for growth, the president decided to raise the capital gains tax, but only to a maximum of 20% on long-term gains (from 15% at present). And, in a pleasant surprise, the top tax on dividends will also go to just 20%.
Even in Ronald Reagan’s heyday, capital gains were never taxed at less than 20% or dividends at less than 28%. As an investor, then, I have to view Obama’s tax policy at least as favorably as Reagan’s.
The result?
Stocks that pay above-average dividends are about to be revalued upward as the market digests the fact that relatively low dividend tax rates are here to stay.
Which dividend stocks stand to gain the most? My vote goes to the electric and telephone utilities. Largely passed by in the monster market rally since March 2009, many of these outfits are so undervalued today that a mere rustle of buyers in the trees could drive up share prices in a hurry.
Here are three such companies.
Dividend Stock #1: PG&E Corp.
Headquartered in San Francisco, PG&E Corp. (PCG) is an unusual business success story. The recession has ravaged the state of California, but by carefully controlling costs and presenting reasonable rate requests to regulators, this electric/gas utility managed to post record operating profits in 2009. I’m expecting a repeat performance in 2010, with earnings per share up another 7% or so. Yet the shares are changing hands at a trifling six times cash flow – below the average regulated utility, despite PCG’s superior operating profile. The stock’s current yield is around 4.3%, and the February dividend hike of 8% trumps the cost of living for income investors.
Favorable tax treatment for dividends will help domestic stocks the most, but I also expect some spillover into the ADRs of foreign utilities because their dividends, too, will qualify for the 20% top rate.
Dividend Stock #2: RWE
RWE (RWEOY) is a German utility that has grown far beyond its roots as the old Rhein-Westphalia Electricity Works. Today, RWE is not only the largest power producer in Germany, but also #2 in the Netherlands and #3 in Britain. Because RWE follows a very conservative policy of paying out only 50%-60% of profits, there’s an excellent chance you’ll be collecting a significantly higher dividend in the years ahead. This utility is going to see continued success simply by merit of providing electricity to the region’s top economies.
Dividend Stock #3: Vodafone Group
U.K.-based Vodafone Group (VOD), one of the world’s largest cellular operators, is trading around nine times estimated earnings for the year ahead. Does this pricing make sense? VOD’s crown jewel is a 45% interest in Verizon Wireless, the most profitable segment of the Verizon empire. Verizon (VZ) itself sells for almost 12x forward earnings. When you can buy a faster-growing business at a 25% discount to a slower one, I suggest you run to your broker’s web site and place an order.
At some point, I can imagine Verizon buying out VOD’s interest at a fat premium, perhaps part of a restructuring that would have VZ spin off its declining land-line business. As a pure wireless company, VZ would likely command a higher market valuation than as an all-things-to-all-people telco. VOD yields around 8%, and there’s no British withholding tax on dividends remitted to Americans, so you can tuck VOD into your retirement account without losing any of the income.
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