After blindly chasing the highest yields in the market, I think one the more common traps dividend investors fall into is narrowing their search to one or two sectors. Personally, I've got a weakness for massive consumer goods companies, but I wouldn't be surprised to find a few dividend investors out there who rarely stray far from utilities. Although both sectors have plenty of solid dividend stocks, it's still a good idea to introduce some diversity into your portfolio. Here are five companies to get you started.
The transition stocks
With a brand portfolio that includes names like Band-Aid, Listerine, and Tylenol, I suppose you could call Johnson & Johnson (NYSE: JNJ) a consumer goods company -- but only if you ignored two-thirds of its business. It actually generates most of its revenue from pharmaceuticals and medical devices. Basically, the stock is an easy way get exposure to a wide swath of the health-care industry.
The past year or so has brought a few missteps for the company in the form of embarrassing recalls, which may worry some investors. However, I'm willing to bet these won't do much harm in the long run. Meanwhile, investors can pick up a 3.5% yield at a reasonable price.
If utilities are more your flavor, then I'd suggest looking at trash-hauling business, which my fellow Fool Robert Eberhard recently called "the new utility." As much as we try to reduce the tons of garbage we create annually, the truth is we'll always need someone to haul it away.
In this industry, it's hard to find a better investment than Waste Management (NYSE: WM), which currently pays a 3.9% dividend. The company operates the largest network of landfills in the country. This gives the trash hauler a tremendous cost advantage since it doesn't have to haul trash as far as its competitors do. Moreover, because no one wants to live next to a dump, obtaining permission to build a landfill is difficult, and once an area already has one, it's unlikely it will allow a competitor to build a second.
I also really like that Waste Management is looking ahead to the days when we can no longer simply bury our trash. In addition to being one of the largest recyclers in North America, it invests in green start-ups, and uses converted landfill gas to generate electricity.
Think globally
While I enjoy holding Yum! Brands (NYSE: YUM) because I get a kick out of telling people that I've invested in Taco Bell and KFC, I actually bought the company because of its success in China. It currently operates more than 4,000 locations -- mostly KFC -- in the country and believes that it can eventually grow to 20,000. Now, that kind of growth on its own is enough to get excited about, but Yum! has also turned its attention to India, where it plans to open 1,000 stores and generate $1 billion in revenue by 2015.
The only downside to Yum! at the moment is that investors have seemed to caught on to the emerging market potential, so the dividend yield is only 1.8%. Still, with a forward P/E of 17, it's not outrageously priced. If you're willing to take a lower yield in return for greater capital gains, the company isn't a bad choice.
While its business model has almost nothing in common with that of Yum!, Intel (Nasdaq: INTC) also benefits from growth in emerging markets. During the company's most recent earnings call, it said that 20% of PCs are now sold in China and that emerging markets now account for two-thirds of PC demand.
The best part of it, though, is the market doesn't seem to have caught on. Intel trades at a forward P/E of just over 10 and pays 3.1% dividend. Add that to its low payout ratio of 33% and the company starts to look like a bargain.
The potential two-bagger
Finally, we have the company that inspired this article, Retail Opportunities Investment Corp. (Nasdaq: ROIC). ROIC is a small-cap REIT headed by a smart real-estate veteran and specializes in rehabbing down-and-out shopping centers that it buys cheap and then either raises the rents or sells them at a profit -- I can see the HGTV series now.
Although most investors would find ROIC's 4% dividend yield enough to start salivating, the real bonus prize is the potential for significant capital gains. Motley Fool Income Investor advisor James Early has said that shares could be worth as much as $23 each, nearly double today's prices.
Foolish takeaway
I believe any of these stocks would make great additions to any dividend portfolio and have backed up my claims with outperform calls on each of these stocks in CAPS. Moreover, I hold shares of all of these companies except for ROIC -- which I may buy in the near future. If you're interested in even more ideas for diversifying your portfolio, then check out this special report: "Secure Your Future With 11 Rock-Solid Dividend Stocks." The report is free, so click here to download it today.
