3 Dividend Stocks That Make Bonds Look Silly

Forget bonds, smart investors today want dividends.

The reason is simple -- with the Federal Reserve continuing to stomp on interest rates, the yields that investors can get from dividend-paying stocks are better than the yields they can get from even longer-duration Treasury notes.

This week, Bespoke Investment Group noted:

With the 10-Year US Treasury now yielding 1.74%, it is now paying a coupon that is less than the dividend yield of more than half of the stocks in the S&P 500. As of today's close, there are now 271 stocks in the S&P 500 that have a greater yield than the 10-Year US Treasury.

While that may sound notable on its own, consider this: When looking at the S&P 500's overall yield, prior to the 2008/2009 crash, we have to go all the way back to 1958 to find the last time that the S&P yield was greater than long-term Treasury yields. This isn't an opportunity that comes around very often.

And remember that while the dividend payouts for many S&P 500 companies will continue to grow as the companies' profits grow, the payout that you'll get from a Treasury note stays fixed.

Big, giant yields!
The first place that many investors head when they are thinking dividends is the biggest, fattest dividends out there. And, let me tell you, there are some seriously plump payouts in the S&P 500 right now.

Telecom companies in particular light up the radar for investors looking for huge payouts as Frontier Communications (Nasdaq: FTR  ) , Windstream (Nasdaq: WIN  ) , and CenturyLink sport respective yields of 11.9%, 10.5%, and 7.5%.

While these aren't on the top of my buy list, there are solid arguments to be made in their favor. For instance, while land-line telephone service may not be nearly the business it once was, the broadband Internet services that these companies also provide are indispensable for most consumers and businesses these days. And even a quick glance at my favorite financial statement -- the cash flow statement -- shows that these companies absolutely gush cash.

That said, these aren't growth businesses. The major avenue for growth in the industry is via acquisition. And even so, there may be a greater possibility of dividends decreasing than increasing. Frontier's annual payout was $1 per share in 2009, but today it's $0.40. And according to data from S&P Capital IQ, Windstream hasn't increased its dividend since 2007.

Lots of other options
As the stat from Bespoke suggests, there are plenty of options for investors that want to grab stocks with dividends that make Treasuries look silly. While some investors may opt for double-digit payouts like the telecoms above, my preference is to target companies that not only pay a handsome dividend, but also have a strong competitive advantage and clear avenues for growth.

To me, the three companies below all fit the bill. I own one of them in my personal portfolio and have rated all three as "outperformers" in my CAPS portfolio.

Walgreen (NYSE: WAG  )
With a current dividend yield of 2.9%, this drugstore giant may not impress some dividend investors, but its credentials as a serious dividend player are more than sound. For one, Walgreen is a member of Standard & Poor's dividend aristocrats -- a group of companies that, as S&P puts it, "have followed a policy of increasing dividends every year for at least 25 consecutive years." In its annual shareholder meeting the company also touted its dividend growth record for investors. After a big dividend boost for 2012, the company's annual dividend growth rate has been 29%, 24%, and 20% for the respective one-, five-, and 10-year periods.

But it's not just about the dividend itself, it's about the company that's behind that dividend. A key selling point for Walgreen as an investment is that the company has a readily identifiable competitive advantage. Namely, it has a strong brand and stores that are easily accessible to customers (more than 7,800 stores to be exact). And it's the strong business that's funding the dividend and keeping Walgreen on my buy list.

Add Walgreen to your watchlist by clicking here.

CSX (NYSE: CSX  )
Do you have to like railroads just because Warren Buffett does? Well, no. However, what Buffett likes about railroads is something that investors should be careful not to overlook. Just as Walgreen has a competitive advantage because of the locations of its stores, railroad operators have an advantage -- one, mind you, that's quite a bit stronger -- that stems from the rail systems that they operate. And what's even better is that as the price of gasoline makes other forms of transportation more costly, the railroads' advantage only grows.

CSX may not have quite the dividend record that Walgreen does -- it cut back its payout after the 2001 recession -- but management has been putting a much bigger focus on dividends lately. For the 12 months ending in March, the annual dividend payout was more than four times what it was just back in 2006. Despite that blazing growth, the company is still only paying out 27% of its earnings.

Add CSX to your watchlist by clicking here.

Intel (Nasdaq: INTC  )
You may think that I'm wrong about Intel, and you may be right. An obvious headline of the tech universe is the ongoing move from desktop to mobile, and Intel just hasn't been the dominant force in mobile that it is in desktop.

However, with the brainpower and resources at Intel's disposal, I wouldn't want to count it out in the mobile arena. At the same time, I wouldn't be too quick to bury the non-mobile chip market -- there's a lot of growth still to be had in emerging markets, and I don't see mobile devices populating the vast datacenters that power the Internet.

As with CSX, you won't find Intel among the dividend aristocrats, but you'll likely be impressed by its dividend nonetheless. Its current yield is 3.2% -- almost unheard of among tech companies -- and its compounded annual growth rate for the five years ending in 2011 was 14%.

Add Intel to your watchlist by clicking here.

Want more?
I've touched on a mere six of the 271 companies with Treasury-beating dividend yields, so there're obviously plenty more where these came from. Because investors have recently been refocusing on the power of dividends, The Motley Fool's special report "Secure Your Future With 9 Rock-Solid Dividend Stocks" has been one of our most popular. You can get your hands on a free copy of that report by clicking here.

The Motley Fool owns shares of Intel. Motley Fool newsletter services have recommended buying shares of Intel. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Matt Koppenheffer owns shares of Intel, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.

 


Read/Post Comments (13) | Recommend This Article (101)

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 May 25, 2012, at 5:24 PM, CoreAndExplore wrote:

    Check out AGNC, a REIT that specializes in mortgage pass-throughs. The yield is 15.52%, and as long as the Fed keeps rates low, the share price should remain stable and in fact is up over 100% since the March lows of 2009. The balance sheet is immaculate and basically every profitability metric you can think of is positively through the roof, thanks to low prevailing interest rates.

  • Report this Comment On May 25, 2012, at 5:34 PM, dgmennie wrote:

    "I've touched on a mere six of the 271 companies with Treasury-beating dividend yields, so there're obviously plenty more where these came from."

    Yes, but Matt, where are the stocks that pay dividends NO MATTER WHAT?? That's why people buy bonds and Treasuries. Only today they are being robbed blind by Government no-interest meddling. The last thing I need in my portfolio is a "great" dividend stock that pays me 7.5% for the next few years and then cuts the dividend to 2% or dumps it altogether (which always remains a very real possibility). Nothing in your article addresses this problem.

  • Report this Comment On May 25, 2012, at 6:11 PM, TMFKopp wrote:

    @dgmennie

    You're absolutely right that stocks -- even dividend stocks -- are a higher risk than bonds. If someone is at retirement age or in retirement, that may be enough of a reason to stick to bonds alone (though still unlikely for most).

    However, while there are no guarantees on dividend payers, think about a company like Walgreen. Paid *and* raised its dividend for more than 25 years. Solid business. Good industry. Competitive advantage.

    Look for companies like that and you reduce the risk of a cut or reduced dividend. But again, there are no guarantees here, so it's also wise to stay diversified.

    And while I've focused on the fact that dividend yields of many stocks are higher than Treasuries, bear in mind that stock investors also have the potential to benefit from capital gains. You don't have any potential for that when you're holding a bond to maturity.

    Final thought -- if you're turned off by the risks of a single dividend-paying stock, there are also dividend-focused index funds you can gravitate towards. Vanguard Dividend Appreciation (VIG) is a one-stop shop for dividends and diversification and comes in a low-cost package. The ETF's yield is also above the 10-year Treasury rate.

    Matt

  • Report this Comment On May 25, 2012, at 6:55 PM, CoreAndExplore wrote:

    I'm a little surprised you picked CSX out of all the railroads. CNI is the best-run railroad in North America, or at least enjoys by far the best operating margins so I'd consider that RR for simple capital appreciation, but NSC has the highest dividend yield, consistently. Also, NSC has stated that it intends to pay out around 33% of its earnings annually, keeping the payout ratio very manageable, and has also been very committed to dividend growth: in the last decade, the company has increased its payments by over 20% annually on average. NSC currently yields 2.83% and CSX yields 2.62%. I consider both companies to be great investments personally, but from a pure dividend play, NSC would be slightly better IMO.

  • Report this Comment On May 25, 2012, at 7:36 PM, ryanalexanderson wrote:

    ...not to mention that dividends can shield you from inflation much better than bonds. And if we're experiencing normal inflation right now, while the economy is in the tank, imagine what it will be like if we get a "recovery"?

  • Report this Comment On May 26, 2012, at 7:51 AM, Joemit wrote:

    PG , MO, JNJ, SCANA, ATT are someI own for reasons Matt stated. A rail stock maybe something to look at while I think intc has a high rate because the stock price is so depressed.

  • Report this Comment On May 28, 2012, at 6:55 AM, rpguy4 wrote:

    CoreAndExplore is absolutely correct. I also own these 3 REITs IVR, AGNC, NLY. Owned all 3 of them for over a year now. With dividend yields over 13%, and interest rates low, these stocks will pay for themselves in no time.

  • Report this Comment On May 28, 2012, at 4:41 PM, EquityBull wrote:

    Investors have little to worry about in terms of Intel and mobile/tablet. Read why mobile is an opportunity that is already in motion for Intel from both tablets/mobile and the server side.

    http://oracleofjersey.com/2012/05/23/could-mobile-devices-an...

  • Report this Comment On June 01, 2012, at 10:59 AM, Chontichajim wrote:

    Even as a pure income investor I agree dividends are the only way to go over bond interest. Of those 3 only INTC is having a decent capital gains year while WAG is approaching a 52 week low. Still, WAG has a low payout rate,and well located stores near lots of urban elderly who aren't going to drive to the burbs for pharmacies. Dividends of these kinds of companies grow and by charting your income stream rather than just current capital value you can see the benefits even in choppy markets.

  • Report this Comment On June 01, 2012, at 8:20 PM, ChrisBern wrote:

    I find this line of reasoning amusing, "Stocks have higher dividends than bond yields...therefore buy stocks". That's investing in a vacuum. First of all there are several asset classes besides stocks and bonds to consider, and only choosing between stocks versus bonds is much too limiting of an analysis. Second, this argument ignores the fact (and IMO the reality today) that NEITHER might be a good investment at the moment. I'm sure there have been more years than not in the past 2 decades where Japanese dividends exceeded their bond yields, and yet how have their stocks done over that time period? (horribly, of course...something like a 90% drop from 1990 highs)

    In any event, the timing of the article was unfortunate for the author and any readers who followed its advice in the short-term. 30-year bonds (VUSTX) were up 5.3% this week while the author's recommendations were all down--WAG -5%, CSX -5.4%, and INTC -3.5%. In one week you just lost your first year or two of dividend-over-yield advantage!

    This is just a tiny sample in one week, of course, but my point is WHO CARES about stocks versus bonds when the answer for most investors should probably be to buy NEITHER right now. Cash is king as global economies are slowing (melting?) down and the only other thing I'd consider investing in is income-producing real estate in VERY select areas of the country, where you can mathematically earn your investment back in ~10 years and where you'll have an inflation shield for the time when we eventually escape deflation and face the inevitable inflation that we're currently lining ourselves up for. Hold on tight Fools!!

  • Report this Comment On June 02, 2012, at 8:14 AM, spanishStrader wrote:

    And for the brave, the Spanish IBEX includes several actions with dividend yields above 10%.

    <a href="http://trading-room.weebly.com">Trading systems</a>

  • Report this Comment On June 05, 2012, at 12:48 PM, BarneyRubbel wrote:

    Amazing, everybody is an expert, yet only a few write columns! Why do people have to be dicks when they respond? This is about sharing ideas.

  • Report this Comment On June 07, 2012, at 2:02 AM, thidmark wrote:

    Yeah, I'll just tell my mom to "consider investing in income-producing real estate in VERY select areas of the country."

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1895414, ~/Articles/ArticleHandler.aspx, 10/24/2014 11:40:45 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement