The High-Yield Dividends to Own for Decades

Go on, admit it! There's nothing to be ashamed about. You love huge dividends.

In uncertain times, it's great to have the security of dividends from stalwarts, and the bigger the payout, the better. But not only does it feel good: In fact, you have tons of research on your side. High-yielding stocks lead to attractive returns over the long term, according to a Tweedy, Browne review of the literature.

Below I highlight a few high-yield stocks that you should consider owning for decades, and I'll offer you free access to a Fool tool that can help you stay updated on these dividend dynamos. So go on and love these high yielders!

It's not just academic
Investment manager Tweedy, Browne looked at a range of studies -- both from researchers and actual investors -- that examined the returns of high yields across various eras. The upshot? According to Tweedy:

  • "There is substantial empirical evidence to support a direct correlation between high dividend yields and attractive total returns."
  • "At least one study demonstrated that the returns associated with market-beating high dividend yield stocks were also less volatile in terms of the standard deviation of returns."
  • "At least one study found that high dividend yield stocks outperformed other value strategies as well as the overall stock market return in declining markets."

So there you have it, the advantages of high-yield stocks -- good total returns, less volatility, and better downside protection. That's a great advantage for investors building a portfolio for the long term.

Importantly, Tweedy also notes that three studies show that the best returns were gained not by the highest-yielding tier of stocks but rather by the second-highest tier. High-yield investing is not simply buying the fattest dividends on the market, since enormous yields tend to signify that investors have lost confidence in the stock, often for good reason.

For example, wireline communications provider Frontier Communications (NYSE: FTR  ) offers a 9.3% yield currently. And while I've said before that it's a good near-term pick as the stock appreciates and can cover its payout, the long-term prospects of that sector are not nearly so attractive as competition intensifies. Instead, it's important to focus on high sustainable yields and businesses with solid prospects.

The high-yield contenders
So let's take a look at six companies that I think you should consider owning for decades. Each company here has a stable franchise and a solid future. In addition, they all sport manageable payout ratios and have shown an ability to grow their payouts over time.

Company

Yield

5-Year Dividend Growth Rate

FCF Payout

Philip Morris International (NYSE: PM  ) 4.0% 25.9%* 50.7%
McDonald's (NYSE: MCD  ) 3.3% 27.5% 57.3%
Vodafone (NYSE: VOD  ) 4.8% 11.3% 55.3%
Exelon (NYSE: EXC  ) 5.1% 5.6% 72.4%
Plum Creek Timber (NYSE: PCL  ) 4.0% 2.0% 72.0%
National Grid (NYSE: NGG  ) 6.6% 7.5% 40.9%

Source: Capital IQ, a division of Standard & Poor's.
* Two-year average growth rate, since the company was spun off.

Those yields are certainly on the high end, but they're not the exorbitant numbers put up by mortgage REITs such as Annaly Capital or wireline players such as Frontier, dividends that are sure to decline once times change.

Philip Morris markets the world's best-known tobacco brand, Marlboro, across the globe. The company is dominant, with 27% of global share (ex. China and the U.S.) Philip Morris sports enormous 41% operating margins and has returned $30 billion to shareholders via dividend and buybacks since it was spun off in 2008. With its strong brands and government regulation acting as barriers to entry, Philip Morris looks poised to continue its dominance.

We all know the Golden Arches for its burgers and fries, but McDonald's should also be known for its increased commitment to dividend investors in recent years, fattening its payout by 27% per year over the last half-decade. McDonald's has been taking steps to unlock value, including refranchising locations and expanding internationally. In addition, the company has a spate of hidden assets, which I detail here.

Vodafone provides mobile communications across the world, serving some 300 million customers, but it's primarily focused on Europe. Perhaps that's why shares trade at just 8 times earnings. I like the prodigious cash flow, which looks set to grow even more as Vodafone's 45% stake in Verizon Wireless begins to pay dividends in the near future. That's what has investor David Einhorn interested enough to buy a stake here.

With all the furor over nuclear energy in the aftermath of the Japan earthquake, you might think that nuclear was dead. Not likely. As one of America's largest utilities, Exelon relies heavily on nuclear power. It's been sitting at five-year lows for the last year -- all the while gushing out its huge dividend.

Plum Creek's dividend growth doesn't look as spectacular as some of the other players' here, and this manager of timberlands has had a rough time in recent years. It's been hurt by the downturn in housing, but there's still a lot to like. Plum Creek is the largest private landowner in the U.S., and timber -- unlike other commodities -- grows in volume each year, about 7%. Also nice, the dividend is treated primarily as a long-term capital gain, despite the fact that Plum Creek is a REIT.

I've called National Grid an outstanding dividend stock and followed through on my commitment to buy shares in the utility, as Fool Rules permitted. The company offers vital infrastructure assets in the U.S. and U.K., and earns a regulated return on its investments as a utility. The payout here is nice, and the company has said that it will plump those dividends by 8% for the next couple of years. The high yield and stable assets make this a juicy play.

A cool Fool tool
These dividend stocks look poised to deliver years and years of great returns, and we can help you keep tabs on your companies with MyWatchlist.com, our free, personalized stock-tracking service. You'll get access to our Foolish content on every stock on your list. Just click on the name to add these companies to your Watchlist: Philip Morris, McDonald's, Vodafone, Exelon, Plum Creek, and National Grid.

What's your personal story on the power of compounding dividends? Have you turned a relatively small initial investment into a dividend dynamo? So many investors have these success stories. What's yours?

Jim Royal, Ph.D., owns shares of every company mentioned here. Exelon and Vodafone are Motley Fool Inside Value recommendations. Philip Morris is a Global Gains pick. McDonald's and National Grid are Income Investor picks. Motley Fool Pro has written puts on Plum Creek and the Fool owns shares of PCL. The Fool owns shares of Annaly, and Philip Morris. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (25) | Recommend This Article (80)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 24, 2011, at 4:21 PM, totaleclipser wrote:

    I have a ? about the Yield rates on your article. Why are they so far off from the actual rate post on Yahoo finance web page such as with NGG, you posted 6.6% but web site says 4.3% as of now..

  • Report this Comment On March 24, 2011, at 4:47 PM, Jbay76 wrote:

    I do not think that TMF updates their data as quickly as yahoo finance. I've found similar discrepancies with other companies. You need to DYODD and cross check

  • Report this Comment On March 24, 2011, at 5:13 PM, plankton97 wrote:

    Yahoo finance is wrong. NGG is a foreign company that pays its dividend twice a year in different amounts (a larger final divvy and a smaller "interim" one) -- unlike most domestic companies, which pay an equal amount quarterly. Yahoo just takes the most recent divvy and multiplies by four, which gives an incorrect result for NGG (either too high or too low). Go to the investor relations section of nationalgrid.com and you can download a dividend payment history in Excel format.

  • Report this Comment On March 24, 2011, at 5:17 PM, turtlewins wrote:

    i've turned an investment of $6000 in a texaco now cvx drip account into $36,000 in about 15 years. granted it won't make me rich, but the story is a powerful reminder of compounding. chevron keeps on going, too....

  • Report this Comment On March 24, 2011, at 5:18 PM, plankton97 wrote:

    Correction - "Yahoo just takes the most recent divvy and multiplies by four", should be "multiplies by two", in the case of NGG...

  • Report this Comment On March 24, 2011, at 5:21 PM, steveelcpo wrote:

    Yield is only as accurate as the dividend and stock price information is current. That's why one of my pet peeves on these articles are dividend yields. A yield is meaningless info if either price or dividend has changed from the time the article was written. Better information would be "at the time of writing, NGG pays a $2.05 annual dividend..." Then I can figure out the yield based on the current price of the stock. Also, if you're talking about dividends, include information about whether that is a quarterly, semiannual, monthly or annual dividend. If I've got to wait six months for a dividend vs investing in a company that's going to pay me next month, all other factors equal, show me the money.

  • Report this Comment On March 24, 2011, at 7:29 PM, craarmy wrote:

    Looking at both Altria MO & Philip Morris PM with High yields I have been wondering if Universal Corp UVV might be a better choice? High yield shield from any medical claims and sells to both PM & MO + British tobacco.

  • Report this Comment On March 25, 2011, at 3:51 AM, antsy65 wrote:

    Hi Craarmy, the problem with Universal seems to be that profits are expected to fall. This reduces the dividend cover and increases the risk of a cut.

    Does anyone know why profits are expected to fall in the next two years and what the prospects of them recovering are?

  • Report this Comment On March 25, 2011, at 4:03 AM, DR1P wrote:

    Steveelcpo,

    Excellent suggestion... but don't hold your breath on getting that information in one of these articles. That would require too much research.

    While we're asking for pertinent information, how about specifying what type of dividend it is? The information I can't remember ever seeing in one of these articles is whether the dividend is regular cash, a qualified dividend, return on investment, capital gain (typical of timber REITs such as PCL) or some combination of the above. Then there is the question of if the company is foreign based and, if so, is tax taken out by that country at distribution. Foreign tax can typically deduct at the end of the year unless the stock is in an IRA (for example), in which case it is lost.

    A stock with a lower annual yield COULD end up allowing you to keep more money after taxes (resulting in a higher effective yield) than one with a higher annual yield (using just the annual distribution amount divided by the current share price) depending on how it is taxed and what your tax status is.

  • Report this Comment On March 25, 2011, at 11:27 AM, mikecart1 wrote:

    antsy65, anyone that tries to convince you that MO is falling obviously doesn't get out much. Everyone smokes. Even hot girls smoke that you wouldn't expect. Take a look at Jersey Shore on MTV. All 8 cast members are chain smokers. They represent a good cut of the typical population. At work we have 'smoke stops' that are packed every second and are located 10 feet from the entrance. People are so addicted to smoking they are willing to clock out for 15-20 minutes just to get their fix.

    MO is the greatest stock on Earth and anyone that wants to dispute this, I will defeat you.

  • Report this Comment On March 25, 2011, at 1:06 PM, mm5525 wrote:

    Mike, I would have to say PM is the best stock on Earth, taking the throne away from MO since spinoff in March 2008. Before then, yes, you're right - MO was the best stock on Earth. PM simply has way more growth, way less regulation, and does not have the FDA breathing down their necks over whether or not they can sell menthols, serious advertising restrictions, etc. The US market is far less than the populations in India, Indonesia, Brazil, Russia, and Japan just to name a few countries. More people = more smokers. Asia has a rapidly emerging middle class, and they love the iconic Marlboro Man. Simply look at the EPS between the two companies. MO earns close to 50 cents a quarter, and PM earns $1.00+. PM is the ultimate weak-USD inflation hedge. Tobacco is a great sector. High profit margins, low cost, loyally addicted customers, and barriers to new competitors. PM has gone from @$50 to $65 since spin off. MO has gone from @22 to 25 since spin off. PM is the best stock in the world, and anyone that wants to dispute this, I will defeat you! :) It's all good, my man. Smoke 'em if you got 'em.

  • Report this Comment On March 25, 2011, at 1:28 PM, foorpoof wrote:

    Your "high dividend" stocks show a maximum dividend that is at the low end of the dividends that are providing us income in our retirement. They may eventually collapse, but by then we will,have had good years of support. For example, Realty Income (O) has been paying us an increasing dividend for more than 20 years. It is now paying more than 5 % and has increased its stock price from $5 (when we first bought it) to more than $30. So it's real dividend to us is about 35% on our original investment.

    Can any of your picks do as well?

  • Report this Comment On March 25, 2011, at 1:29 PM, foorpoof wrote:

    Our current income is about 60% from dividends. So we are not interested in 2% or 3% payouts. We can't afford them.

    Show us some REAL dividends!

  • Report this Comment On March 25, 2011, at 1:40 PM, mm5525 wrote:

    foorproof, I own PAA, CHKM, and PNG. All of these MLPs (Master Llimited Partnerships) are like REITs in that they have to pay out the bulk of their earnings as distributions to the unitholder. All 3 I mentioned above yield close to 6% and are simple oil/nat gas pipelines or storage centers. Pretty safe stuff. Plus, every quarter they increase their distributions. Just something to consider if you are looking for income. PAA pays over 6%, CHKM is 4.69%, and PNG is 5.97%. In CHKM's and PNG's cases, they are both new MLPs just IPOing last summer (2010). MLPs rapidly increase their distributions early on in their expansion to attract more capital. MLPs do offer secondary offerings of shares, which will periodically hurt your holdings by dilution, but that is their business model by design to do secondaries.

  • Report this Comment On March 25, 2011, at 4:06 PM, Fundament wrote:

    Dividend growth is great but FCF growth need to grow too. If not, the payout ratio rises as happened by most of your introduced stocks. This case is not sustainable. If a company raises dividends faster than earnings the payout ratio will exceed 100 percent and substance will be paid out. The second question is the capital efforts of growth. VOD needs more money to grow as PM. If the company pays more to investors, the growth slows or debt is rising – both items are not good for the enterprise value of the company. I think it is better to focus on low leveraged companies with low payout ratios. I found a screen of 20 growth stocks with a dividend yield of more than 1 percent and a payout ratio of less than 30 percent. Here is the table:

    http://t.co/ieoo7XG

    The average dividend yield of the 20 stocks amounts to 1.77 percent while the average P/E ratio is 17.52. Price to book ratio is 5.65 and price to sales ratio 2.43.

  • Report this Comment On March 25, 2011, at 5:43 PM, TMFRoyal wrote:

    Hi, plankton97,

    You're exactly right on the semiannual dividend payouts from NGG. The yield figures on popular sites are often wrong because they simply double the latest payout, leading them to overstate and understate the yield depending on what time of the year it is.

    Fool on.

    Jim

  • Report this Comment On March 25, 2011, at 5:48 PM, TMFRoyal wrote:

    Hi, mm5525,

    I agree with you on PM. It's a tremendous stock, with huge margins, offers a good deal of global diversity, and sports a nice yield that is growing quickly. Its positioning is phenomenal.

    Fool on

    Jim

  • Report this Comment On March 25, 2011, at 5:49 PM, TMFRoyal wrote:

    Hi, mm5525,

    I agree with you on PM. It's a tremendous stock, with huge margins, offers a good deal of global diversity, and sports a nice yield that is growing quickly. Its positioning is phenomenal.

    Fool on

    Jim

  • Report this Comment On March 27, 2011, at 12:45 PM, trenton1ryan wrote:

    @mm5525: Thank you for clearing that up :)

  • Report this Comment On March 28, 2011, at 11:37 AM, donkyboy wrote:

    MO and PM are both, somehow, Philip Morris tobacco company. Marlboro,etc. Can someone explain to the newbie please.

  • Report this Comment On March 28, 2011, at 5:19 PM, pryan37bb wrote:

    @donkyboy:

    PM USA - owned by Altria Group (MO), sells only in US.

    PM International - different company (PM), same products, sells everywhere else.

    They used to be one company under Altria Group (MO), until they spun off their foreign operations into the new company (PM) a few years back.

  • Report this Comment On March 29, 2011, at 1:48 AM, mm5525 wrote:

    Yes, that was almost exactly 3 years ago this week when MO spun out PM as a separate company. March 31, 2008. MO also spun off KFT earlier. The point of the spinoff/separation is MO was tired of ALL their earnings being negatively influenced by the endless flow of US lawsuits MO was having to pay to U.S. claimants who somehow didn't know cigarettes are bad for you and wanted to blame the company for why they had associated health problems for the conscious choices they made in life. This was affecting the bottom line in the food and international area, so MO's response: "We'll protect our earnings in Kraft and overseas and spin off both companies." Can't mess with MO or PM's management as these guys know how to make money and protect shareholder value. I don't feel that way at all about KFT these days, but I continue to hold that dog with fleas just for the juicy dividend. Of note, MO owns @29% of SABMiller, the world's second largest brewer, so MO has a little international exposure that way.

  • Report this Comment On April 01, 2011, at 11:41 AM, paul7777777 wrote:

    I would never buy stocks from a tobaccofirm, I think that they are a menace to mankind and make misabuse of the stupidity of a lot of people.

    In the developed countries most educated people don't smoke anymore because they know how bad it is for your health and they don't want to look soon wrinkled and smell bad and governments do there more to protect people against smoking. In retarded countries a lot of people still smoke, and die young, but as progress comes, so will common sense do.

  • Report this Comment On April 01, 2011, at 1:29 PM, metaforgirl wrote:

    I'll tell you something three generations of stockbrokers in my family have taught me. Don't invest long in a bad bet. PM sells dangerous drugs to addicts. NEVER invest in a product you can't support. If you can only make money if billions of people are unable to kick a lethal habit, you are betting against your own species AND shaking hands with the devil.

    Invest in green energy or tech stocks if you want to go long.

  • Report this Comment On April 12, 2011, at 6:32 PM, kramsigenak wrote:

    No one mentions the crushing Billions of debt for MO and PM. Doesn't bother some, not thanks for me.

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