I love fat payouts from dividend stalwarts. In fact, I've recommended a couple that I called "dividend plays for a lifetime" for their strong competitive positions and hidden assets. Those two stocks -- Microsoft and McDonald's -- are solid long-term dividend plays. But often, it can be more valuable to find higher-yielding stocks that are slower- growing, rather than a Microsoft that is fattening dividends at a prodigious clip.
For example, take a stock with a 6% yield growing at just 5% per year, and a stock like McDonald's paying 3% and growing around 10% per year. It will take almost 15 years for the low-yielder's payout to catch up with the high-yielder's, even though the low-yielder's growing faster. To be fair, that doesn't include capital gains, which would likely be better for a McDonald's-type stock. Still, if you need current cash flow, you don't want to wait for capital gains. So today, I want to take a look at some high-yielding stocks that could be great plays for 2011.
The wireline space has been a particularly good performer in 2010, with major players CenturyLink
But I think Frontier still has a lot of room to run, especially since these companies should be valued on their dividends. Frontier now offers a 7.9% yield, compared to Windstream's 7.1% and CenturyLink's 6.2%. Why do these three companies have such disparate yields?
If the market were to give Frontier shares similar yields to either Windstream or CenturyLink, its stock could still have upside of 11% to 27%, respectively, in addition to that meaty dividend. Even better, Frontier's free-cash-flow payout in the latest quarter was just 59% -- leaving the company some room to boost its dividend, perhaps back to the $1 level that we saw before the recent acquisition of Verizon's lines.
One further kick to all the companies in the industry is the possibility of consolidation as the wireline space becomes even more competitive. We've already seen some of the effects of that in the past few years, and there well could be more of it. This would push up stock prices even further. So those are the reasons Frontier could be a nice winner in 2011, and they're why I own the stock myself.
It's hard to argue with a company that has been a dividend darling for as long as Altria
Like the wireline telecom space, the tobacco industry has come under pressure, but Altria the stock has plenty of puffs left in it. And using the simple mathematics that I described above, it still can make a lot of sense to buy into this market leader now.
The third high-yield superstar
Annaly Capital Management
Annaly thrives in a low-interest rate environment, making it a great countercyclical play, and we have every indication that low interest rates will continue for some time. The Fed has already said that it will maintain low rates for an extended period. And even with Quantitative Easing 2.0 in full gear, there are already rumblings of a third iteration of the program, which would push interest rates still lower. So if you believe in the disinflation or deflation hypothesis, this company could be for you.
Alternative ways to play the deflation hypothesis would include Annaly spinoff Chimera Investment
Foolish bottom line
I've outlined three companies that I think could be solid dividend plays for 2011. While these may not be stocks you want to own in 20 or 30 years, they offer the ability for current income now and in the immediate future. Do you have other great dividend play for 2011? Let me know in the comments boxes below.
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Jim Royal, Ph.D., owns shares in Frontier Communications, Microsoft, and Annaly Capital. Motley Fool Options has recommended a diagonal call position on Microsoft, which is a Motley Fool Inside Value pick. The Fool owns shares of Altria, Annaly Capital, and Microsoft. 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.