Dividends: A payment four times a year from a company to its investors. A way to share net income with owners. Long-time shareholders of successful companies may eventually receive quarterly dividends in the thousands of dollars. Easy street. Independently wealthy.
Last week, we sang the praises of dividends and launched a search for high-yielding stocks. Readers posted more than one hundred messages in response (thank you!). Today we share some of your high-yield ideas and mix in a few of our own. First, though, a reminder and a warning.
We're seeking companies that offer fee-friendly dividend reinvestment plans (Drips), and we're seeking companies that are growing earnings as well as dividends -- companies with rising stocks, not just high yields. In fact, we're leery of incredibly high yields because that usually means damaged goods or zippo growth.
Also, we're avoiding utilities, even though they're typically high-yielding, because we don't have a comfort level with them. For now, we're not addressing high-yield REITs, either. They are interesting, but REITs are a whole other barrel of fish that we'll need to learn of in depth before we can seriously consider them.
Unless noted, the following companies offer fee-friendly Drips, typically yield at least twice the S&P 500 average, and are likely to continue growing earnings and sales, albeit sometimes slowly.
High-yield stocks
We start with three healthy financial stocks. Financial companies often pay decent dividends, although many of the leaders today yield only about 2% to 3%. We've found three that offer higher yields and free Drips.
Washington Mutual (NYSE: WM), 3.30% yield, is a consumer and business financial services company, offering mortgage, commercial and consumer banking and financial services. At $30 per share, it trades at 1.8 times book value and has a P/E of 9.7. You'd never guess that the stock has nearly doubled in the past five years. With good management, future appreciation is likely, and the dividend appears safe.
FleetBoston Financial (NYSE: FBF), 4.04% yield, operates in the U.S. and Latin America and, other than running services similar to Washington Mutual, it also focuses on middle-market and asset-based lending, trade finance, government and investment banking. Being in higher-fee business lines, FleetBoston has a P/E of 16. The stock has gained about 65% the past five years before adding the dividend yield.
Union Planters Corp (NYSE: UPC), 4.80% yield, is a multi-state bank holding company with a primary business of... ta da... banking. It earns more than $2 billion annually in net interest income. The stock has gained about 40% the past five years after rising more than 80% since early 2000. If the stock dips, you might grab it with a 5% yield and over time you could see significant long-term share appreciation, too. UPC currently has a P/E of 13.
The June issue of the monthly Motley Fool Select featured research on high-yield companies and offered nine stock ideas.
UST, Inc. (NYSE: UST), 5.39% yield, was one of Select's ideas. UST is the leading maker of smokeless tobacco products (you know -- it's in baseball players' mouths) and a seller of premium wines and cigars. Since vices are usually recurrent, love 'em or hate 'em, they make for good business. UST has massive 50% operating margins and 30% profit margins.
Sales grow only about 5% annually on average, and the stock has gained about 40% in the last five years, but it also yields 5.39% annually in dividends and it has a P/E of 12. The main risk is litigation, but that risk appears mitigated.
RPM (NYSE: RPM), yield 3.95%, was offered by readers on the Drip board. One investor there has happily owned RPM for 30 years. The company sells specialty coatings to industrial and consumer markets, including Rust-Oleum and Bondo, among other sealants, floor coatings, roofing systems and more. Revenue typically tops $500 million per quarter, though the profit margin is below 4%. The stock is flat with prices of five years ago, although it rose 45% in the last year and it grew earnings 27% last quarter.
Lance (Nasdaq: LNCE), yield 4.83%, has sold snack foods since 1913, with 2000 sales of $576 million and $22 million in net income. It is a modest grower and it has low profit margins, and in fact its stock is down the last five years, but Lance creates consistent cash flow and yields nearly 5%.
Adding Lance to a watch list for potential purchase at prices considerably below the current $13 level (watch for something more like $9, assuming the dividend remains intact) may be a worthwhile endeavor for someone with patience. Lance is the only company of these six that charges fees, however, for buying stock and reinvesting dividends in its Drip, so it is not recommended as a Drip stock -- only as a yield stock, but at a much lower share price than today. This and a negative return the past five years make it the least attractive of the six.
Next week we'll have more high-yield investment ideas, including some big names you'll recognize, and including one that offers a 5% discount on shares purchased in its Drip. If you have any additional high-yield, free-Drip-offering stock ideas to share, please post them. Fool on!
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Jeff Fischer doesn't own any of the companies mentioned here, but he does own the companies in the Drip Portfolio, as you can see in his online profile. The Fool has a disclosure policy.
