Forget bonds, smart investors today want dividends.
The reason is simple -- with the Federal Reserve continuing to stomp on interest rates, the yields that investors can get from dividend-paying stocks are better than the yields they can get from even longer-duration Treasury notes.
This week, Bespoke Investment Group noted:
With the 10-Year US Treasury now yielding 1.74%, it is now paying a coupon that is less than the dividend yield of more than half of the stocks in the S&P 500. As of today's close, there are now 271 stocks in the S&P 500 that have a greater yield than the 10-Year US Treasury.
While that may sound notable on its own, consider this: When looking at the S&P 500's overall yield, prior to the 2008/2009 crash, we have to go all the way back to 1958 to find the last time that the S&P yield was greater than long-term Treasury yields. This isn't an opportunity that comes around very often.
And remember that while the dividend payouts for many S&P 500 companies will continue to grow as the companies' profits grow, the payout that you'll get from a Treasury note stays fixed.
Big, giant yields!
The first place that many investors head when they are thinking dividends is the biggest, fattest dividends out there. And, let me tell you, there are some seriously plump payouts in the S&P 500 right now.
Telecom companies in particular light up the radar for investors looking for huge payouts as Frontier Communications
While these aren't on the top of my buy list, there are solid arguments to be made in their favor. For instance, while land-line telephone service may not be nearly the business it once was, the broadband Internet services that these companies also provide are indispensable for most consumers and businesses these days. And even a quick glance at my favorite financial statement -- the cash flow statement -- shows that these companies absolutely gush cash.
That said, these aren't growth businesses. The major avenue for growth in the industry is via acquisition. And even so, there may be a greater possibility of dividends decreasing than increasing. Frontier's annual payout was $1 per share in 2009, but today it's $0.40. And according to data from S&P Capital IQ, Windstream hasn't increased its dividend since 2007.
Lots of other options
As the stat from Bespoke suggests, there are plenty of options for investors that want to grab stocks with dividends that make Treasuries look silly. While some investors may opt for double-digit payouts like the telecoms above, my preference is to target companies that not only pay a handsome dividend, but also have a strong competitive advantage and clear avenues for growth.
To me, the three companies below all fit the bill. I own one of them in my personal portfolio and have rated all three as "outperformers" in my CAPS portfolio.
With a current dividend yield of 2.9%, this drugstore giant may not impress some dividend investors, but its credentials as a serious dividend player are more than sound. For one, Walgreen is a member of Standard & Poor's dividend aristocrats -- a group of companies that, as S&P puts it, "have followed a policy of increasing dividends every year for at least 25 consecutive years." In its annual shareholder meeting the company also touted its dividend growth record for investors. After a big dividend boost for 2012, the company's annual dividend growth rate has been 29%, 24%, and 20% for the respective one-, five-, and 10-year periods.
But it's not just about the dividend itself, it's about the company that's behind that dividend. A key selling point for Walgreen as an investment is that the company has a readily identifiable competitive advantage. Namely, it has a strong brand and stores that are easily accessible to customers (more than 7,800 stores to be exact). And it's the strong business that's funding the dividend and keeping Walgreen on my buy list.
Add Walgreen to your watchlist by clicking here.
Do you have to like railroads just because Warren Buffett does? Well, no. However, what Buffett likes about railroads is something that investors should be careful not to overlook. Just as Walgreen has a competitive advantage because of the locations of its stores, railroad operators have an advantage -- one, mind you, that's quite a bit stronger -- that stems from the rail systems that they operate. And what's even better is that as the price of gasoline makes other forms of transportation more costly, the railroads' advantage only grows.
CSX may not have quite the dividend record that Walgreen does -- it cut back its payout after the 2001 recession -- but management has been putting a much bigger focus on dividends lately. For the 12 months ending in March, the annual dividend payout was more than four times what it was just back in 2006. Despite that blazing growth, the company is still only paying out 27% of its earnings.
Add CSX to your watchlist by clicking here.
You may think that I'm wrong about Intel, and you may be right. An obvious headline of the tech universe is the ongoing move from desktop to mobile, and Intel just hasn't been the dominant force in mobile that it is in desktop.
However, with the brainpower and resources at Intel's disposal, I wouldn't want to count it out in the mobile arena. At the same time, I wouldn't be too quick to bury the non-mobile chip market -- there's a lot of growth still to be had in emerging markets, and I don't see mobile devices populating the vast datacenters that power the Internet.
As with CSX, you won't find Intel among the dividend aristocrats, but you'll likely be impressed by its dividend nonetheless. Its current yield is 3.2% -- almost unheard of among tech companies -- and its compounded annual growth rate for the five years ending in 2011 was 14%.
Add Intel to your watchlist by clicking here.
I've touched on a mere six of the 271 companies with Treasury-beating dividend yields, so there're obviously plenty more where these came from. Because investors have recently been refocusing on the power of dividends, The Motley Fool's special report "Secure Your Future With 9 Rock-Solid Dividend Stocks" has been one of our most popular. You can get your hands on a free copy of that report by clicking here.