With bond yields having gone sideways, dividends can look even more enticing.
The 10-year U.S. Treasury note was recently at 2.68%, down from 3.23% in early November. The average yield of S&P 500 (.SPX) companies is 2%, but many are above 3%.
A big yield, however, can reflect poor stock performance, as the accompanying table illustrates. Seven of the 10 stocks included have negative one-year returns.
At the same time, dividends are a crucial component of long-term returns, and bigger yields can offer some safety. They also can pay investors to wait.
For this column, Barron’s looked for S&P 500 stocks whose yields exceed 3%. That led us to more than 100 companies.
But we weren’t interested in just any high-yielding stocks. We narrowed the list by tapping Reality Shares, an index provider that has a system of ranking dividends for their safety. We focused on companies whose dividends are considered safe and likely to grow.
Making the cut
These stocks, all yielding above 3%, rank in Reality Shares' top category for dividend safety.
|Company||Ticker||Recent Price||Market Value (bil)||Dividend Yield||1-Year Return||2018 Dividend*||2019E Dividend|
|SL Green Realty||SLG||90.67||7.6||3.8||-4.2||3.29||3.41|
|T. Rowe Price Group||TROW||98.88||23.2||3.1||-11.4||2.80||2.96|
|PNC Financial Services||PNC||123.43||56.4||3.1||-21.5||3.40||4.09|
*Based on most recent fiscal year; E=estimate; dividends are per share; data as of Feb. 26. Sources: Reality Shares; FactSet
In analyzing dividend safety, Reality Shares uses seven factors. They include earnings growth over the previous 12 months, a company’s dividend actions over the previous five years, the ratio of cash spent on stock buybacks versus dividends, and how much free cash is available to cover dividend payments.
Under the system, a rating of five means that a stock’s dividend is in the safest category and least likely to be cut. It’s more likely, in fact, to be boosted. A one rating, the lowest, means that a company is more likely to cut its dividend than those with higher ratings.
No system is foolproof, and it’s hard to forecast dividend cuts. But Reality Shares was on the mark with at least two companies recently: Coca-Cola (KO), which announced that it would increase its quarterly payout by a penny, to 40 cents a share, and Kraft Heinz (KHC), which slashed its quarterly payout by 36%. Before the announcements, Coke’s rating was four, while Kraft Heinz’s was two.
The highest-yielding stock on our list is drugmaker AbbVie (ABBV), at 5.3%, though its one-year return is minus 30%.
The company is heavily dependent on Humira, a blockbuster drug used to treat rheumatoid arthritis, Crohn’s disease, and psoriasis. Its sales totaled nearly $20 billion in 2018, up 8% from 2017. It accounts for more than 50% of AbbVie’s sales and an even bigger portion of its profits.
But as generic competitors emerge, Humira’s sales are starting to come under pressure. For example, international sales of the drug in the fourth quarter of 2018 totaled $1.3 billion, down nearly 15% in local currencies. The company cited direct competition from biosimilar products “in certain international markets.”
The company’s CEO, Richard A. Gonzalez, told analysts on an earnings call in late January that “our focus has been on building a pipeline that would allow us to absorb the impact of biosimilar competition and a strong and growing business.”
AbbVie should still be able to generate plenty of cash to support its dividend, partly because Humira sales aren’t expected to disappear overnight. Analysts surveyed by FactSet expect its sales to fall about 5% this year to about $19 billion.
Still, 2018 sales of AbbVie’s cancer drug Imbruvica topped $1 billion in the fourth quarter, up 42% year over year. Morningstar projects that the drug’s annual sales could peak at above $6 billion.
In November, it declared a quarterly dividend of $1.07 a share, up from 96 cents.
AbbVie is the only pharmaceutical company on our list. There is one tech firm, Broadcom (AVGO); one real estate investment trust, SL Green Realty (SLG); two energy stocks, Marathon Petroleum (MPC) and Phillips 66 (PSX); asset manager T. Rowe Price Group (TROW); and four banks—the largest of which is JPMorgan Chase (JPM).
Having recovered and moved well beyond the financial crisis of a decade ago, banks, for the most part, have been regularly boosting their dividends. Their stocks have lagged behind, however, amid concerns that include the durability of the U.S. economy. All four of the banks on our list have negative one-year returns.
Last September, JPMorgan Chase, which yields 3.1%, boosted its quarterly dividend to 80 cents a share from 56 cents. The consensus 2019 earnings estimate is $9.76 a share, compared with $9 in 2018, and the dividend should grow along with the earnings.
The other banks on our list are smaller— Comerica (CMA), Regions Financial (RF), and PNC Financial Services (PNC). These large regional banks should see decent earnings growth this year.
Broadcom, which makes semiconductors, is one of the few companies on the list with a positive one-year return, about 12%. But investors need to keep in mind the deep cyclicality of the chip business, Broadcom’s healthy yield of 3.9% notwithstanding.
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