In a jittery market, it makes sense to scout out stocks that pay a high dividend yield. First off, dividends can provide investors a steady return, even when stock prices are volatile, says Edward Jones financial adviser Jesse Abercrombie. In fact, a 4% annual dividend is enough to double the money investors make on a stock purchase in about 18 years–that is before factoring in stock market gains over time [based on the rule of 72: 72 / % return on money=years to double money].
On top of that, dividend payers are particularly valuable in a shaky economy (see “How You Can Profit from Market Volatility,†this issue). That’s because they require a hefty commitment on the part of corporate management. Think of it this way: A company has to be pretty confident about its business in order to share a slice of its profits with shareholders. Dividend payers tend to be large, blue-chip companies with a proven track record of results. It’s that sort of dependability that helps to steady the performance of dividend-paying stocks in turbulent markets.
Then there’s the fact that interest rates on Treasury bonds have been quite low. Abercrombie says dependable companies that pay an above-average yield (the ratio of a company’s annual dividend payout to its stock price) are an attractive substitute.
A Texas native, Abercrombie works in the investment firm’s Dallas office, where he manages money for high-net worth clients. Named a top financial all-star by Black Enterprise in 2010, Abercrombie talked to BE about three of his stock picks.
1) Johnson & Johnson (JNJ) is one
of just four companies that carry a AAA grade on its debt. The company offers a 3.6% yield and has been very reliable–it’s made steady payments since 1944 and has increased its dividend annually for the last 49 years. I think the company can accelerate its earnings growth over the next few years thanks to breakthroughs from its biopharmaceutical businesses. The company’s pipeline includes potential new treatments for Alzheimer’s disease, prostate cancer, hepatitis C, and a stroke prevention medicine. In our view, shares do not fully reflect the value of J&J’s pipeline potential, and as a result we believe shares are attractively valued. Meanwhile, J&J should be affected less and less by major patent expirations on earlier products.STOCK PRICE: $64.36Â Â -Â Â DIVIDEND YIELD: 3.6%
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2) AT&T (T)
pays a 5.8% dividend. The telecommunications giant has made payouts since 1984 and has increased dividends steadily over the last 26 years. If completed, AT&T’s merger with T-Mobile USA will make it the No. 1 wireless operator in the U.S. (At press time, the U.S. Justice Department filed an antitrust lawsuit to block the proposed acquisition.) The union should bring about operating savings that will fully offset the purchase price. Over the past five years, AT&T has grown its dividend about 5% per year on average. We expect a 2% growth rate in the next five years. We expect revenue growth in a stabilizing economy thanks to AT&T’s wireless and television businesses.STOCK PRICE: $28.79Â Â -Â Â DIVIDEND YIELD: 5.8%
3) Kinder Morgan Energy Partners (KMP) which operates oil and gas pipelines and storage facilities, pays a 6.6% dividend yield. Kinder Morgan has some 28,000 miles of pipelines used to transport natural gas and refined oil. The company has paid a dividend since 1992 and has increased its payout to investors the last 14 years running. We think Kinder Morgan can generate low double-digit income earnings growth this year, reflecting acquisitions and increased demand for storage capacity. For the past decade this dividend stock has delivered annualized total returns of 19.5%. What’s more: A $10,000 investment in Kinder Morgan 20 years ago would be worth $190,000 today. In the next year, the company plans to build up its energy transportation and storage assets–one reason we think it is insulated from any decrease in oil or gas prices.
Stock Price: $70.56Â Â -Â Â DIVIDEND YIELD: 6.6%