Editor's Note: A previous version of this article erroneously listed Transocean as a dividend payer. The Fool regrets the error.
Are there better opportunities out there?
That's the question you should be asking yourself each time you buy a stock. Perhaps you've got your next stock purchase all planned out. Before you buy, though, you should consider a few pretty darn compelling stocks that I'm about to highlight.
Why now?
Before I reveal the stocks I'm talking about, we need to understand the market environment in which we're operating.
Late 2008 saw a collapse from unsustainable highs. Mid-2009 saw a recovery from fear-driven lows. And for the last six months, we've been in kind of a detente from the stock market craziness -- bouncing within a fairly tight range.
Based on Professor Robert Shiller's 10-year market P/E ratio, the stock market is priced a bit above historical multiples, but we're nowhere near 10 years ago, when we were at double the current multiple.
Meanwhile, there is still much economic, regulatory, and macro uncertainty out there.
A time like this -- an uncertain time when the market doesn't appear wildly overvalued or wildly undervalued -- is when stock picking matters most. The uncertainty allows for a divergence in opinion among market participants; the market moderation prevents individual stock differences from being drowned out by an overpowering market tide.
The stocks to jump on
In this environment, I've increased my focus on hunting down quality companies that pay dividends. Why? Because they provide the best mix of upside and risk-mitigation right now.
Buying into strong companies that can support high dividend payments gives us an investment that pays out cash at rates rivaling today's bond yields. Plus, if we get in at good prices, we stand to gain through share price appreciation.
To find some good candidates for investment, I screened for companies with high dividend yields (dividends divided by stock price) AND strong earnings yields (earnings divided by stock price). My two criteria:
- Dividend yield > 3%
- Earnings yield > 5% (equates to a P/E ratio of less than 20)
All other things equal, the larger the spread between an earnings yield and a dividend yield, the more stable the dividend; after all, over the long term you can only pay out what you make.
Here are some of the more intriguing candidates I found, pulled from a variety of sectors (in order of dividend yield):
|
Company |
Recent Dividend Yield |
Recent Earnings Yield |
|---|---|---|
|
Altria |
6.8% |
7.6% |
|
AT&T |
6.5% |
8.1% |
|
BP |
5.8% |
9.3% |
|
Philip Morris International |
4.5% |
6.4% |
|
Merck |
4% |
10.9% |
|
Diageo |
3.3% |
6.6% |
|
McDonald's |
3.3% |
6.4% |
|
Coca-Cola |
3.3% |
5.4% |
|
VF |
3% |
5.2% |
Source: Capital IQ, a division of Standard & Poor's.
The ideal company easily covers its dividends with its earnings AND has the ability to grow both over time. Assessing the latter is the tricky part.
It takes a good amount of research to properly estimate the stability and growth prospects of earnings (and the resulting dividends). To help you get started, let me share what the dividend experts at our Income Investor newsletter think.
They've recommended three of the companies above to their members -- Coca-Cola, Diageo, and VF, based on their research. The Income Investor analysts believe each company has the ability to support and grow its dividends over the long term. However, one stands out. Diageo (maker of Captain Morgan, Johnnie Walker, and Guinness) is one of five stocks on their current "Buy First" list. To see the names of the other "Buy First" stocks, I invite you to take a free 30-day trial. Click here to learn more.
Anand Chokkavelu owns shares of McDonald's, Altria, and Philip Morris International. He has the Sugarhill Gang song in his head because of this column's title ... jump on it! Diageo, Coca-Cola, and VF are Income Investor recommendations. Coca-Cola is a Motley Fool Inside Value recommendation. Philip Morris International is a Motley Fool Global Gains pick. The Fool has a disclosure policy.
