10 U.S.-traded dividend income stocks picks for a yield-hungry market

05/24/2013 8:30 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Everybody is on the hunt for higher yields. With a 3-month Treasury bill yielding 0.03%, way less than the rate of inflation, and a 10-year Treasury yielding just 2.04%, barely more than inflation, who can blame them. And too many investors seem willing to add lots of risk in their hunt for yield—10 years is a long time to lock up your money in even something as safe as a Treasury note if interest rates or inflation go up. Buying a corporate junk bond might get you 5% or 6%, but these are the riskiest corporate debt out there. If the economy stumbles, junk bonds will tumble.

If you’re looking for higher yield and you don’t want to sacrifice safety, I think you’re best bet is to look for dividend stocks from solid companies. The payouts from a dividend stock go up over time—unlike the fixed payouts from a bond—giving you protection if interest rated rise. And if you pick a company with a solid and growing cash flow from its business, you’re taking on much less risk than you would with a junk bond.

Best of all, if you dig real hard you can find stocks paying dividends of 3%, 4%, 5%, and even, occasionally 6%.

In this market, of course, even with lower risk dividend-paying stocks you can’t just buy and forget. These days being a dividend investor means paying attention to when a stock gets over value and when it’s a buy on a stumble.

What follows is a list of 10 dividend—U.S.-traded stocks only on today's this list--stocks that at this moment best combine payout and safety. I’ll be adding some of these to my Dividend Income portfolio http://jubakpicks.com/ today. Some of these are already members of that portfolio. In that portfolio you can also find some non-U.S.-traded dividend stocks.

Bank of Nova Scotia (BNS); yield 4.06%

This is the third largest of Canada’s six major banks. (Together the six hold 90% of Canada’s bank assets.) And, by far, the one with the most exposure to emerging markets in Latin America and Asia, although the bank by has by no means neglected its Canadian market in recent years. In the last year Bank of Nova Scotia, or Scotia Bank, bought ING DIRECT Canada to add 2 million Canadian accounts and acquired a 51% stake in Banco Colpatria in Colombia. Customer headcount comes to 8 million in Canada and 11.5 million internationally. The mix gives Bank of Nova Scotia exposure to faster growth in emerging markets and the stability of a big deposit base in the highly regulated Canadian market. The bank has growth dividends by 4.6% a year over the last five years. Standard & Poor’s gives Bank of Nova Scotia an A+ credit rating.

General Electric (GE); yield 3.2%

With General Electric you’re sacrificing some yield today for the promise of more yield tomorrow. After cutting its dividend during the financial crisis, thanks to GE Capital’s neck deep exposure to the mortgage crisis, the company has gradually rebuilt its dividend from a quarterly 10 cents a share in 2009 to 19 cent a share in 2013. And there’s more on the way. The company has said it will spend $18 billion in cash on shareholders in 2013 with most of that ($10 billion) going to share buybacks. Revenue from the company’s industrial segment is projected to climb by 5% to 10% this year with margins climbing an estimated 0.7 percentage points. General Electric plans to gradually shrink GE Capital until it represents about 30% of company earnings. Standard & Poor’s give General Electric an AA+ rating. General Electric is a member of my Dividend Income portfolio http://jubakpicks.com/

Holly Energy Partners (HEP); yield 5.11%

Holly Energy Partners is a master limited partnership spun off by refiner HollyFrontier (HFC) in 2004. Assets include 2,600 miles of pipelines, 12 million barrels of storage, and oil terminals in the west and southwest. This is a very low risk master limited partnership because almost 100% of its revenue comes from fees with built in inflation matching (as opposed to contracts with prices based on commodity prices) and because Holly Energy assets are focused near the such prime areas of the U.S. midcontinent oil boom as the Permian Basin of Texas. Distributions climbed 6.7% in the first quarter of 2013 from the first quarter of 2012. The five-year average annual increase in distributions has been 5.31%.  Master limited partnerships are tax-advantaged vehicles best owned outside a retirement account. (Part of the annual distribution is treated as a return of capital and is not taxed until you sell the units.)

Intel (INTC); yield 3.72%

Once upon a time technology companies didn’t pay dividends. Now Intel and others such as Microsoft (MSFT) and Cisco Systems (CSCO) do. (Microsoft’s yield is 2.66% and Cisco pays 2.91%.) Call it a clear sign that these erstwhile tech rockets have become mature giants. But something interesting has developed in the way that Intel plays the dividend game. The company not only pays a higher yield than other technology companies, but it has also been very aggressive in increasing its dividend during periods when the share price has climbed so that the yield stays above 3%. Intel’s five-year annual rate of dividend growth is a huge 12.82%. That puts it ahead of consumer dividend plays such as Procter & Gamble (PG), which shows a hefty 9.55% annual growth rate in its dividend over the last five years. I think part of that reason is that the company sees itself going through s tough transition from the PC-centered world its chips dominate to a world dominated by smart phones and tablets. Intel has turned its powerful manufacturing engine to catching up with such new paradigm leaders as Arm Holdings (ARM) and Qualcomm (QCOM.) The release of Intel’s Atom chip using 22-nanometer manufacturing this year and at 14-nanometers in 2014 will help close the gap that Intel in energy efficiency. But this is a long-term battle. Fortunately, Intel is good at those. Standard & Poor’s gives Intel an A+ credit rating. Intel is a member of my Dividend Income portfolio http://jubakpicks.com/

Kinder Morgan Energy Partners (KMP); yield 5.87%

This master limited partnership is in expansion mode thanks to the acquisition of El Paso by Kinder Morgan Inc., the owner of Kinder Morgan Energy Partners general partner. This has resulted in a pipeline of asset dropdowns that are headed to Kinder Morgan Energy Partners over the next few years. Kinder Morgan Energy Partners spent $1.8 billion on growth in 2012 and its capital budget for acquiring natural gas pipelines in 2013 runs to $2.9 billion. This puts Kinder Morgan Energy Partners in the sweet spot in a financial market awash with cheap money: Raise cheap capital, buy assets, increase distributions—and repeat. Kinder Morgan’s average annual rate of growth for distributions has been 7.1% over the last five years. (Master limited partnerships are tax-advantaged vehicles best owned outside a retirement account. Part of the annual distribution is treated as a return of capital and is not taxed until you sell the units.) Standard & Poor’s gives Kinder Morgan Energy Partners a BBB credit rating. Kinder Morgan Energy Partners is a member of my Dividend Income portfolio http://jubakpicks.com/

ONEOK (OKS); yield 5.36%

Master limited partnership ONEOK has stumbled recently—which is why you can buy a 5.36% yield on this normally very stable dividend payer. The culprit was a shrinking spread in natural gas liquids as a result of soaring supply of these liquids due to the boom in midcontinent U.S. energy production. (ONEOK gets more of its revenue from transportation where prices are linked to commodity prices than does a competitor such as Targa Resources Partners (NGLS). See Slide 9.) I think you’ll have to be patient with ONEOK since the squeeze in spreads for natural gas liquids is likely to continue through much of 2013. That will lead to a temporary slowdown in the growth of distributions but I think you can count on a gradual pickup from the 6.3% annual average growth rate of the last five years. (Master limited partnerships are tax-advantaged vehicles best owned outside a retirement account. Part of the annual distribution is treated as a return of capital and is not taxed until you sell the units.) Morningstar gives ONEOK a BBB credit rating. ONEOK is a member of my Dividend Income portfolio http://jubakpicks.com/

SeaDrill (SDRL); yield 8.29%

This is by far the riskiest stock or master limited partnership on the list. By leveraging each rig it completes to finance construction of the next rig, SeaDrill has grown from 11 rigs in 2005 to 50 at the end of 2011 with another 18 under construction. Not only has SeaDrill become the owner of the second largest deep sea drilling fleet in the world, next to Transocean (RIG), but it has also become the owner of one of the newest and most advanced fleets in the industry. That lets SeaDrill collect the highest day rates for its fleet. By pledging its existing rigs to raise debt to finance new rigs, SeaDrill has severely reduced its flexibility in any industry downturn. Because it needs the revenue from its rigs, SeaDrill wouldn’t be able to stack them in a downturn and would have to keep them in operation by cutting prices. That, in turn, could make any down turn worse. At the moment there’s no downturn in demand for deep sea drilling rigs in site, but this leverage is certainly something to keep in mind if you own SeaDrill. Morningstar gives SeaDrill a B credit rating. SeaDrill is a member of my Dividend Income portfolio http://jubakpicks.com/

Targa Resources Partners (NGLS); yield 5.63%

Targa is in the right pace at the right time to take advantage of the midcontinent boom in the U.S. production of natural gas liquids, a key feedstock for the chemical industry. This master limited partnership has just made its first acquisition in the Bakken, adding an oil pipeline to its natural gas liquids focus. The U.S. energy boom has put the squeeze on the price of natural gas liquids oil (see ONEOK in Slide 7,) but fortunately for Targa and its investors the company gets a relatively high 46% of its revenue from free-based services where prices don’t depend on commodity spreads. (Targa projects that it will expand its fee-based business to 55% of revenue by the end of 2013 and to 65% by the end of 2014. Distributions have grown at an average annual rate of 12.5% over the last five years. (Master limited partnerships are tax-advantaged vehicles best owned outside a retirement account. Part of the annual distribution is treated as a return of capital and is not taxed until you sell the units.) Morningstar gives Targa B+ credit rating. Targa Resources Partners is a member of my Dividend Income portfolio http://jubakpicks.com/

Westpac Banking (WBK); yield 6.62%

Westpac is one of just four banks that control the Australia/New Zealand banking market. In the first half of 2013 return on equity grew to 16.1% and revenue rose by 5% from the first half of 2012. Net interest margins rose 1 basis point, a good performance in the current low interest rate environment and impaired assets as a percentage of total non-securitized loans fell to 0.83% from 0.94%. The Australian economy has slowed lately leading to interest rate cuts from the Reserve Bank of Australia. That could put pressure on net interest margins and on bad loan ratios. The bank has grown dividends at an average annual rate of 8.2% over the last five years. Westpac Banking is a member of my Dividend Income portfolio http://jubakpicks.com/

Johnson Controls (JCI); yield 2.03%

I’ve left this one to last because it is a classic old-time dividend growth pick. The yield isn’t all that high but the company has paid a dividend every year since 1887. In 2009 it froze the dividend, breaking a 33-year record of increasing the dividend each year. Because of that freeze, these shares don’t show up in most dividend growth screens, which look at the last five years, but the company’s 7.9% average annual rate of dividend growth since 2009 is what you’d expect from a company with a very long-term commitment to dividend growth. The company has three main businesses—auto interiors, building energy efficiency, and auto batteries that give it—usually—a very stable cash flow. Standard & Poor’s gives Johnson Controls a BBB+ credit rating. Johnson Controls is a member of my Jubak’s Picks portfolio http://jubakpicks.com/

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did own shares of Johnson Controls, SeaDrill, and Westpac Banking as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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