Today, the S&P 500 has an aggregate dividend yield of 2.08%, a pretty paltry yield from a historical standpoint. For investors who want income today or are hoping to use reinvested dividends as a wealth generator over multiple decades, then such a modest yield isn't going to get it done. Luckily, there are quite a few dividend stocks, with dividend yields more than double the S&P 500, that currently look like solid dividend investments. Three that look especially compelling are Magellan Midstream Partners (NYSE:MMP), Ford Motor Co. (NYSE:F), and National Grid (NYSE:NGG). Here's a quick look at why investors might want to consider these three stocks for a higher yield portfolio.
A solid business model supported by a superior management team
There are a lot of different reasons why Magellan Midstream Partners is a compelling investment. It has a solid business model with a contract based revenue that is mostly fixed fees. Those fixed fees insulate it from commodity price fluctuation. Its network of refined petroleum product pipelines has a pretty fixed customer base, making gasoline and diesel demand and refinery supply pretty consistent. It also has a solid backlog of development projects that should keep its dividend payments growing for years to come.
Of all these advantages, the one that is most compelling is the company's management team and its conservative approach to growing its business, its payout to shareholders, and its handling of the balance sheet. Rather than so many other companies that have pursued growth for growths sake during the recent shale boom, Magellan has taken a much more measured approach and focused on smaller investments with higher rates of return. The average EBITDA multiple on its $1 billion plus capital spending program is 7.1 times, which is much lower than what other companies have pursued in recent years.
By being more selective about its development projects and keeping its debt levels in check, Magellan has set itself up well to keep its streak of 57 straight quarters of payout increases going for some time. With a yield of 4.8%, that's a pretty compelling investment.
At the top of the cycle, but ready for the bottom
Investors in the automotive industry may be a little nervous after Ford's executives recently admitted that we may be at or near the top of the demand cycle for new vehicles in the U.S. That is why, despite Ford knocking the cover off the ball during its recent earnings, shares trade at an absurdly low price-to-earnings ratio of 5.6 times and a dividend yield of 4.9%. If you are concerned with share price appreciation over the next year or so, I can totally understand why investors may be avoiding this stock as automotive demand cools off. For those looking for an attractive income investment, though, Ford does look pretty appealing.
One of the major points that Ford CFO Bob Shanks made at the company's most recent Investor Day presentation was that the company fully intends to maintain its dividend through the ups and downs of the business cycle, and it currently sees no issue with paying its dividend at current rates until 2018. What's even more promising, though, is that investors may see even greater dividends as management has stated its intention to pay supplemental dividends when it has the financial leeway to do so. With more than $20 billion in cash on the books today, that is looking like a possibility.
An even more stable version of utilities
Electricity utilities have traditionally been a safe dividend investment because most of them operate as regulated businesses with fixed rates of return. There are still the risks, though, of competitive electricity prices and the need to meet the new regulations for carbon emissions from power plants that make the cash flows at electric producing utilities a little bit of a question mark. One part of the electric system that isn't under as much pressure is electric transmission and distribution, a subset of the business that is dominated by National Grid.
The bulk of National Grid's earnings come from electricity and gas transmission and distribution assets in the United Kingdom, a very mature market that generates loads of cash without much need for investments to grow since National Grid is the predominant player in the country. Without the need to upkeep power plants, maintenance capital requirements are much lower for the company and allow it to return large amounts of cash to shareholders and invest in its largest growth market, the United States.
National Grid is a little different than most dividend paying stocks because it pays a variable dividend based on a percentage of annual net income. Also, its dividend payments come only twice a year rather than the quarterly payments that most U.S. based companies make. For anyone that isn't bothered by this slight tweak to the payout schedule, then National Grid's 4.5% yield looks pretty attractive.