Two Safe High-Yield Stocks

07/01/2008 12:00 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Jim Jubak, senior markets editor for MSN Money, finds two stocks that fit the criteria of his new "unfixed-income" investing strategy.

Things are tough for income investors. Yields are so low that income investors are losing ground every day to inflation, now running at an annual rate of 4.2%.

But the next 12 to 18 months look even tougher. Any increase in interest rates will drive down the price of existing income vehicles.

But I do have a fix for the problem. It's a strategy I first wrote about in April, which I'm calling "unfixed-income investing."

My goal is to find equity investments with yields above the percentage paid by five-year Treasury notes (3.54% on June 30th) or, ideally, above the yield on ten-year Treasury notes (4.1% on June 30th). These stocks should be as safe as or safer than the five- or ten-year Treasuries under current market conditions. [The companies also should have] superior histories of raising dividends year in and year out.

I've got two candidates that fit the bill.

Toronto-Dominion (NYSE: TD) is the second-largest bank, by assets, in Canada. The Canadian market is a gold mine for banks: Limited competition keeps fees high and leads to a fat 22% profit margin for the Canadian banking sector.

But the company's entrance into the US market [with] its acquisition of US customer-service legend Commerce Bancorp in 2008 at a very modest 25% premium will provide the earnings growth to drive increasing dividend payouts.

The bank has experienced relatively little damage from the meltdown in the financial sector. In the second quarter of its fiscal 2008, Toronto-Dominion added just $152 million to its reserves for bad loans.

Wall Street now forecasts earnings growth of 12.2% for the fiscal year that ends in October and 11.5% for fiscal 2009. That should be more than enough to keep dividends growing in the next few years at something very close to the 13.5% annual rate of the past five years. The stock now yields 3.62%. (It closed Monday above $62-Editor.)

Enbridge (NYSE: ENB) carries a relatively modest yield of 2.94%, but the company has increased its dividend by an annual average of 10.1% over the past five years. The company has impressive pipeline projects over the next two to three years:

The Alberta Clipper Expansion is projected to deliver as many as 800,000 barrels of heavy crude a day from Alberta's oil sands by mid-2010, [while] the Southern Access Expansion will deliver 400,000 barrels of heavy crude a day in 2009, [and] the Clarity pipeline will transport natural gas from the Barnett Shale and Anadarko Basin in Texas.

Wall Street projects earnings growth of 10.5% in 2008 and 14.4% in 2009-enough to keep dividends growing for the next five years at something like the rate of the past five years.

I don't see any energy sector correction in the next 12 months being deep enough to make a huge difference to yields. So, I'll bite the bullet on Enbridge. (It closed above $43 on Monday-Editor.)

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