There are a lot of ways for investors to get from the start of their working career to a comfortable retirement, but the easiest way from Point A to B tends to run through dividend-paying stocks. Over time, dividend stocks tend to handily outperform stocks that don't pay a dividend, making them an ideal buy-and-hold candidate.
The profits and pitfalls of dividend investing
What is it about dividend-paying companies that makes them so attractive to the long-term and retired investor? To begin with, dividends act as a beacon that lets investors and retirees know that a company's business model is so fundamentally sound today that it can afford to share a percentage of profits with its shareholders. Secondly, dividends help ease the pain during stock market corrections and bear markets. They don't erase the red arrows, but they certainly help hedge your losses a bit. Finally, and most importantly, dividends can be reinvested back into more shares of stock, allowing your position and future dividends to compound. This last point is where substantial wealth can be created over time.
On the flip side, investors have to be prudent not to simply chase a stock with a high dividend yield. Yields are a function of share price, meaning a company with a rapidly deteriorating business model and share price could, in theory, have a high-yield and incorrectly look like a great buy to an income-seeking investor. Income investors need to be willing to look at the entire picture to establish whether a dividend is sustainable.
This diverse income portfolio has triple the yield of the S&P 500
So what do you do if you want a high-yield portfolio that's also diverse? The answer is you scour the nearly 400 companies currently yielding 5% or higher and come up with a short list of five diverse high-yield giants that could add some real kick to your nest egg. This is precisely what I did, and the average yield of the following income portfolio that I'm about to share is 7.5%, or triple the current yield of the S&P 500. With yields like this, your nest egg could double from the dividend alone about once every decade.
Let's have a look at which five companies make the cut.
Seagate Technology: Technology, 7.4% yield
The technology sector isn't known for its dividends, but Seagate Technology (STX) is among the best exceptions. Many investors worry about the emergence of solid-state drives and what that might do to Seagate's bread-and-butter hard-disk drive segment, but it appears to be more an overreaction than anything.
What's driving Seagate's growth is the expectation of a storage demand increase from enterprises for cloud computing and data centers. Seagate actually has both hard-drive and solid-state drive selections to offer enterprises, thus covering both bases.
Additionally, Seagate has been purchasing back its stock hand-over-fist. After announcing a $2.5 billion share repurchase program in 2012, Seagate, in April 2015, announced another $2.5 billion share buyback. Share buybacks can make a company's valuation look particularly attractive. Between the buybacks and its 7.4% yield, it's easy to see why income investors may want to hang onto this stock for years.
GlaxoSmithKline: Healthcare, 6% yield
GlaxoSmithKline (GSK 0.51%) hasn't had the easiest go of things over the past couple of years due to the imminent emergence of a generic version of inhaled COPD and asthma blockbuster Advair. The good news is, at least according to GSK's latest results, newer product growth is outpacing the drop we're witnessing in Advair's sales.
Looking toward the future, there's a lot for income investors to latch onto. GSK has a burgeoning HIV franchise that's growing by a triple-digit percentage on a year-over-year basis; its next-generation respiratory franchise is getting off the ground after a modest launch, and it's on pace to launch up to 20 assets by 2020 and perhaps up to 40 by 2025. This is a deep pipeline that shouldn't be overlooked.
Considering the pricing power that drugmakers possess, GlaxoSmithKline and its 6% yield have to be on income investors' radars.
General Motors: Industrials, 5% yield
Up next, we'll look at a company that's been driving over the competition: General Motors (GM 1.35%). Forget the company that was a debt-riddled disaster from a decade ago, because the new GM is a lean, mean profit machine, and it all starts with innovation.
In 2014, after more than a half-decade without a makeover, General Motors redesigned its Chevy Silverado and GMC Sierra to the delight of consumer, who've responded by pushing sales of both trucks higher. GM is also benefiting from its innovative interior and exterior focus on its Chevy sedans. According to GM, Chevy remains the fastest-growing full-line brand as of February. We're also seeing positive impacts from GM's focus on vehicle interiors. The addition of infotainment systems has helped improve the perceived luxury of the vehicles GM sells without pushing the sale price of these vehicles out of reach. Lastly, GM's also rejoicing in low fuel prices. Lower gas prices encourage the consumer to buy SUVs and trucks, which come with high margins.
Sporting a low forward P/E of five and a 5% yield, this is an income stock that could remain in high gear.
Annaly Capital Management: Financials, 11.7% yield
Annaly Capital Management (NLY 2.88%) may take a lot of flak as a mortgage real estate investment trust (mREIT), but it's been among the highest-yielding dividend stocks over the past decade, and it's likely to remain so moving forward.
Annaly mostly buys agency-only mortgage-backed securities. What this means is Freddie Mac or Fannie Mae guarantee Annaly's assets against default. Of course, assets that are guaranteed against default often have low yields, thus a rising interest rate environment is often bad news for Annaly because it likes to lever up and pump up its profits. However, the Federal Reserve doesn't look as if it's going to be aggressive with lending rates anytime soon. That's great news for Annaly as it means it can continue to expect low borrowing costs and a steady net interest margin.
Annaly is also pushing into higher-yield credit assets in order to boost its net interest margin. It does run the risk of default by adding these assets to its portfolio, but its management has maintained a conservative approach to add a bit of asset diversity. Even if a dividend cut is in Annaly's future, I'd surmise it remains head and shoulders above the S&P 500's average yield.
Holly Energy Partners: Basic materials, 7.3% yield
Last, but not least, we have Holly Energy Partners (HEP 0.50%), a midstream oil transportation, terminaling, and storage company, which also happens to be a subsidiary of HollyFrontier.
Despite oil being beaten like a punching bag, Holly Energy Partners has done very well thanks to its prime geographic pipeline locations in the central, south-central, and southwestern United States. The company is also benefiting from the ability to pass along price increases, as well as its ongoing pipeline expansion. All told, in fiscal 2015 Holly Energy Partners delivered revenue increases for its refined products pipeline, crude pipeline, and terminaling operations. Only intermediate pipeline revenue declined, and even here it was just by $0.9 million to $28.9 million.
Holly Energy Partners' conservative expansion has allowed its cash flow to grow right along with its dividend. In fact, the company has increased its payout in 45 consecutive quarters, with little near-term fears of a cut. These are some figures high-yield investors can possibly get behind.
As always, the companies listed above should be considered a starting point for your research into safe, high-yield dividend stocks and not a concrete buy recommendation. Every investor's needs and risk tolerance differs, but these five companies could definitely be worth your time if you're looking to add substantive, diversified income on a regular basis.