Investors these days are inundated with uncertainty. Not to recite the litany of potential problems threatening the health of the increasingly weak global recovery (European debt, slowing growth in China, the U.S. recovery losing steam, etc., etc., etc.), but we have a lot weighing on our shoulders. Navigate to any news site and you get swamped by these stories. Enough of it.
All this noise gets distracting. Although these problems are not to be completely overlooked, investors need to fight to remember some of the most important (and oftentimes basic) tenets of investing at times like these. So, enough with the negativity. We here at the Fool invest for the long term exactly for that reason: We don’t know what the future will hold, especially in the short term. However, we do know that buying quality companies at low prices, reinvesting the dividends, and holding them for the long term generally produces at least satisfactory results, and hopefully much better. In line with this, I’ll present you with 13 cheap, high-yielding stocks that have impressive histories of growing those payouts.
Good and getting better
The companies below share a number of traits. They all have market caps over $2 billion (so you avoid buying into more risky micro-cap companies). They each have yields in excess of 3% and trade for less than 15 times their current diluted earnings per share. Finally, they all have grown their payouts at a rate greater than 20% annually over the last 10 years. Let’s see what they have to offer.
|
Company |
Dividend 10-Year CAGR* |
Dividend Yield |
P/E |
|---|---|---|---|
| Philippine Long Distance Telephone | 51.8 | 7.2% | 10.2 |
| Southern Copper (NYSE: SCCO) | 37.8 | 8.9% | 11.1 |
| Darden Restaurants | 37.5 | 3.9% | 13.6 |
| Mattel | 30.5 | 3.5% | 13.1 |
| Intel Corporation (Nasdaq: INTC) | 27.4 | 3.8% | 10.2 |
| BHP Billiton | 24.5 | 3.1% | 8.0 |
| Hasbro (Nasdaq: HAS) | 22.0 | 3.5% | 13.1 |
| Telkom Indonesia (NYSE: TLK) | 22.0 | 6.1% | 12.7 |
| Linear Technology | 21.9 | 3.3% | 11.5 |
| ConocoPhillips (NYSE: COP) | 21.7 | 4.1% | 8.0 |
| Molex (Nasdaq: MOLX) | 21.5 | 3.9% | 12.2 |
| Aflac (NYSE: AFL) | 20.8 | 3.6% | 8.4 |
| Greif** | 20.1 | 3.7% | 8.9 |
Source: Capital IQ (a Standard & Poor’s company) and Yahoo! Finance. *CAGR = compound annual growth rate. **Greif shares listed here are the A class shares.
There’s a lot to like with these companies for those in search of investment income. They offer compelling returns in the form of their above-average dividend yields at present. However, their value lies in their ability to consistently grow their payments at a high rate. The power of compound interest is a truly beautiful thing, and these firms look like powerful compounding machines. Warren Buffett, a hero around these parts, cites his transition to seeking companies with this same trait -- the ability to grow at consistently high rates over long time horizons -- as a key development in his career, and rightly so.
The power of compounding
As a thought exercise, say you buy a stock for $10 that yields 3%. You’ll get $0.30 in your first year of holding that stock. You reinvest those dividends, which gives you $10.30 of capital (for simplicity’s sake). In year two, good news strikes. Your company raised its payout to you by, say, 20%, the threshold for the companies above. Now your $10.30 holding pays you $0.37 this time around ($10.30 x [0.03% x 1.2]). Now your total capital, assuming you reinvest those payments, comes out to $10.67, versus the $10.60 you’d have without any growth. While that difference might seem small in year two, it makes a big difference in returns over time.
The Foolish bottom line
Investing in dividend-paying companies carries many advantages. Mixing the steady stream of income dividend-paying companies produce with the magic of compound interest can produce some really impressive results. Regardless of present circumstances, if you devise a plan to buy cheap, high-yielding stocks, odds are you’ll come out ahead. Investing for the long term altogether ignores the market in the short term. It might be better for you to put away that crystal ball of yours and turn to the tried-and-true basics of investing.
Many of us here at The Motley Fool love dividends, and for good reason. Our analysts recently compiled a report containing 13 more high-yielding stocks to buy today. Best of all, it’s absolutely free. Click here to access your free copy of it today. Your portfolio will thank you later.
