It's far too early to judge the effects of the Federal Reserve's recent interest rate cuts. In fact, it may be years before we know whether Fed Chairman Ben Bernanke's aggressive actions helped heal the banking industry and restore consumer confidence, or whether lower interest rates merely weakened the dollar further and ushered in an era of stagflation.
Fortunately, we needn't wait one minute longer to identify a class of investments that stand to benefit from lower interest rates: high-yielding dividend stocks.
Why dividends?
The benefits of dividend payers are no secret: According to Ned Davis Research, between 1972 and 2006, S&P companies that paid dividends produced an annualized gain of 10.3%. Meanwhile, those S&P companies that elected not to reward shareholders with dividends returned just 2.4% each year.
Besides better returns, dividends also provide investors with stable, predictable cash flows -- a prized attribute in a turbulent market environment.
Sure, but why dividends now?
Those are certainly compelling reasons to consider investing in dividend stocks, but those aren't the reasons why I'm so bullish on dividend payers right now. For that, we can thank Mr. Bernanke.
You see, as interest rates drop, investor interest in high-yielding stocks should only intensify. Right now, the five-year Treasury note carries an implied yield of 2.5%. Investors buying Treasuries today will be lucky to outpace inflation over the next half-decade.
Meanwhile, there are 1,630 stocks that have dividend yields of 2.5% or greater -- as well as the potential for capital appreciation and dividend increases over that time period. I know which type of security I'd rather hold.
Tricks of the trade
Of course, there's a little more to a successful dividend investing strategy than merely selecting a handful of the highest-yielding stocks. Many companies currently boast double-digit dividend yields that simply aren't sustainable. As I've pointed out before, a high payout ratio can actually be a bad sign if the company can't generate enough free cash to keep those dividends flowing.
Below, I've highlighted seven stocks with superior yields to the five-year Treasury note. And to make sure that those dividend checks keep coming in the mail, I've taken a page out of Motley Fool Income Investor advisor James Early's playbook and filtered out any company with a payout ratio over 80% of free cash flow.
Seven superior stocks
|
Stock |
Dividend Yield |
|---|---|
|
Anheuser-Busch |
2.7% |
|
AT&T |
4.4% |
|
DuPont |
3.5% |
|
Kraft Foods |
3.4% |
|
Harley-Davidson |
3.5% |
|
McDonald's |
2.8% |
|
Verizon Communications |
4.6% |
These companies are all household names, and each offers a higher yield than the five-year Treasury note. Better still, these stocks should be strong enough to produce dividend increases and share price appreciation over that five-year period as well. However, with the exception of Kraft Foods, these are only candidates for further research -- not formal recommendations.
To see which stocks James and co-advisor Andy Cross do recommend that you include in a high-yielding, Treasury-trouncing portfolio, click here for a free 30-day trial of the Income Investor service. It may be too early to evaluate Bernanke's rate cuts, but it's hardly too late to profit from them.
Rich Greifner eventually replaced the page he took from James Early's playbook. Rich does not own shares in any of the companies mentioned in this article. Kraft Foods is an Income Investor recommendation. Anheuser-Busch is an Inside Value selection. The Fool has a disclosure policy.
