The 3 High-Yield Dividend Stocks I'm Buying Next

Back in January, I called out National Grid (NYSE: NGG  ) as the outstanding dividend stock I was buying next. In April, I called CVR Energy Partners (NYSE: UAN  ) as one huge dividend play. Those stocks have gone up 18% and 29% (dividend-adjusted), respectively -- phenomenal performances in an otherwise lackluster market. While I still think those stocks have good prospects for gain, I'm now back to let you in on three more high-yield stocks I'm buying next week. Two of these names offer more than twice the yield of the average S&P stock, and the third provides more than eight times!

Read on to get the names of those three stocks, and I'll also give you the opportunity to download a special free report from The Motley Fool.

High yields = high total return
It feels good to buy dividend stocks -- it's the security of having income pouring in year after year regardless of whether the market bids your stock up (though that's great, too). But the academic literature also suggests that high-yield dividend payers -- exactly like the three names I'm about to reveal -- are strongly correlated with attractive total returns, to paraphrase the Tweedy, Browne report that summarized the findings.

In a review of the literature, Tweedy also discovered that, "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." In other words, dividend stocks don't suffer from as much volatility, meaning you're less likely to experience a decline in value. And that's really attractive for those in or nearing retirement.

Notably, Tweedy discovered that the best total returns were not from the highest-yielding tier of stocks, but rather the second-highest tier. So don't go out and buy the fattest dividends out there, since these yields tend to signify that investors have lost confidence in the company. That said, one of the three stocks I've identified does have a huge yield, but there's every reason to have plenty of confidence in it.

Drum roll please ...
So without further ado, here are the three high-yield stocks I'll be buying next week, as Fool rules permit.

Company

Yield

Valuation

Dominion Resources (NYSE: D  ) 4.0% P/E = 9.2
SUPERVALU (NYSE: SVU  ) 3.6% Adjusted P/E = 7
Annaly Capital (NYSE: NLY  ) 14.0% P/B = 1.18

Source: Capital IQ, a division of Standard & Poor's.

Dominion Resources
This utility pays a solid dividend and is cheap, too, at just nine times earnings, so you've got the income safety of a utility and the downside protection of a value stock. While its dividend won't drive the stock price massively, the way I expected it to with CVR Energy Partners and National Grid, Dominion has solidly outperformed the S&P over the last decade, and I think there's more to come. The company has a payout ratio of just 35%, meaning its history of raising dividends by about 7% over the last five years should continue.

The company has some 2.4 million electricity customers in Virginia and North Carolina, 1.2 million natural gas customers in Ohio, and 1.8 million merchant power customers across 12 states. It also has transmission and gas pipeline infrastructure -- exactly the type of stable assets that attracted me to National Grid back in January. With regulated operations making up about 55% of its earnings, providing a solid and stable base, while the rest comes from sales of power on the free market. Low unemployment and a quickly growing regional economy in Dominion's service areas provide much promise that this company can boost its dividend.

SUPERVALU
This stock is very cheap and has the potential double in the near future. Strong returns and fat dividends -- sign me up!

Some investors might love to hate on SUPERVALU. After all, the company reported a loss of $1.5 billion in the last four quarters. But you need to dig deeper than that to see this gem's beauty. That loss was caused by a $1.9 billion writedown of goodwill. Excluding that, the company earned a $1.40 per share. The company predicts $1.20 to $1.40 in earnings this year. The company has committed to rapidly paying down debt without sacrificing its dividend. The dividend consumed just 13% of its free cash flow over the last four quarters, suggesting that it's well-covered.

SUPERVALU does have its problems, though. It's undertaking a massive turnaround to get its costs in line, and has hired an industry veteran from Wal-Mart, CEO Craig Herkert, to get the job done. The company is focusing on deploying capital smartly, investing in its hard discount chain Save-A-Lot. While grocery stores have been hurt by the encroachment of Wal-Mart, Save-A-Lot may be able to do what deep discount chains such as Family Dollar have done: steal share from Wal-Mart. Our newsletter Motley Fool Hidden Gems identified SUPERVALU last year, and I'm confident enough in its prospects that I've also bought shares in my public-facing Rising Star portfolio.

Annaly Capital
You might see Annaly's huge yield and be scared away. And you should be skeptical: That high yield won't last forever. But the good news is that all the signs point to its safety in the near future. Unemployment remains high, and Friday's jobs report did nothing to help the market's confidence. Interest rates remain low, and should stay low as long as unemployment is up. That's creating a great environment for mortgage real estate investment trusts such as Annaly, Chimera Investment (NYSE: CIM  ) , and American Capital Agency (Nasdaq: AGNC  ) .

These mortgage REITs borrow at the currently low, short-term rates and buy long-term mortgage-backed securities, so they make money on the rate spread. Annaly invests in government-backed securities, so its key risk is the level of interest rates. While Chimera uses less leverage, it buys riskier mortgages, so I'm less interested in this one. And while American Capital Agency offers a higher yield (19%) than Annaly, it doesn't have a long history, having been founded in 2008. In contrast, Annaly was incorporated in 1996 and has been through good markets and bad, and its management team is regarded as one of the best. I already own shares of Annaly, I've also purchased them for my Rising Star portfolio, and I'll be adding more still.

Foolish bottom line
I'll be buying the three names above, and I think you should consider these names, too. If you're interested in more high-yield dividend stocks, then download a free report from Motley Fool expert analysts called "13 High-Yielding Stocks to Buy Today." Hundreds of thousands have requested access to this report, and today, I invite you to download it at no cost to you. To get instant access to the names of these high yielders, simply click here -- it's free.

Jim Royal, Ph.D., owns shares of National Grid, Annaly, and Dominion. The Motley Fool owns shares of SUPERVALU, Chimera, Wal-Mart, and Annaly. Motley Fool newsletter services have recommended buying shares of Dominion, National Grid, and Wal-Mart. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart. Motley Fool newsletter services have recommended buying calls in SUPERVALU. 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 (4) | Recommend This Article (50)

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 July 09, 2011, at 5:39 PM, PoundMutt wrote:

    Are Annaly Capital dividends taxed like Master Limitted Partnerships, i.e. like ordinary income and where you have to file a tax return in every state where it operates?

  • Report this Comment On July 10, 2011, at 10:42 PM, jekoslosky wrote:

    PoundMutt, Annaly is an REIT, so its dividends are taxed just as ordinary income.

  • Report this Comment On July 11, 2011, at 6:55 PM, jimwheeler12345 wrote:

    I'd question why you're using P/B for valuation of NLY. Shouldn't all REIT's have a P/B close to 1?

  • Report this Comment On July 14, 2011, at 10:03 PM, louis564 wrote:

    I bought Dominion 30 yrs ago and re-invested the

    dividends for 25 yrs. I started with 200 shares

    and now have almost 2000 shares and divd

    raises almost every year. You can't beat it.

    Thank you Dominion Resources.

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