With bond yields offering little, income-focused investors have been turning to stocks to provide the regular cash they seek. The trade-off, of course, is that stocks are riskier than bonds.
Dividend-paying stocks provide both cash and a cushion against market volatility and portfolio risk. But this is no secret, and in this low-yield environment investors have embraced dividend stocks. Yet meanwhile, S&P 500 (.SPX) companies at least are apparently being stingier with their capital, as dividends increased at their slowest pace since 2011.
Nonetheless, cash is cash, and so dividend-paying stocks are having their day. Most of these stocks can provide short-term portfolio protection, but only some are worth holding as longer-term investments for appreciation and decent — and secure — income. Here are five such stocks to consider:
- Ticker: HSBC
- Sector: Financials
- Market Cap: $120 billion
- YTD Performance: -21% vs. +1% for the S&P 500
- Dividend Yield: 8.1%
Shares of HSBC Holdings have been dead money since the first rumblings of a European Union breakup in 2011. And the battered British banking company is once again facing headwinds as talk of a so-called Brexit from the EU grows.
European banks in general have been taking it on the chin lately with sagging share prices and slumping earnings, including an 18.2% decline in net profit for HSBC in its most recent quarter. However, Citigroup analysts see the current lows in European-based banks as a buying opportunity given the negativity that's priced in. HSBC, for instance, trades at a roughly 30% discount to its book value.
There's undoubtedly risk here. But if you're going to play the long game counting on a EU banking turnaround, there's plenty of income potential at HSBC to sweeten the pot and hedge your bet. Based on the last four quarterly payouts, the stock yields about 8.1% annually at current pricing.
- Ticker: T
- Sector: Telecom
- Market Cap: $240 billion
- YTD Performance: +13%
- Dividend Yield: 4.9%
It's hard to imagine telecom giant AT&T Inc. ever putting up significant growth metrics given its highly regulated and capital-intensive business. But this year, AT&T is expected to post double-digit top-line growth and is bouncing back significantly from losses in the fourth quarter of 2014.
Furthermore, AT&T continues to see a robust mobile and data business — including mostly stable numbers in its "Consumer Mobility" segment and double-digit growth in both business wireless subscribers and business broadband connections for 2015 vs. 2014. Furthermore, in its most recent quarterly report, margins were up nicely due in large part to a big jump in consumer wireless, to 29.9% in operating income margin from 25.5% last year.
After some outperformance lately, there is good reason to think AT&T's momentum could slow. But with a forward price-to-earnings ratio of just 13, this stock isn't exactly expensive — and with a beta of less than 0.35, AT&T isn't likely to go bonkers on you and melt down.
Throw in a juicy 4.9% dividend that reflects about two-thirds of earnings, and investors can rely on this telecom giant no matter what the market throws their way in the coming months.
British American Tobacco
- Ticker: BTI
- Sector: Consumer Staples
- Market Cap: $115 billion
- YTD Performance: 10%
- Dividend Yield: 3.7%
Tobacco isn't a growth industry, and British American Tobacco PLC is hardly a growth stock. However, there is a great deal of stability and income potential from this company and its suite of brands that include Kool, Benson & Hedges, and Lucky Strike cigarettes.
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While its revenue has been challenged for several years now, British American Tobacco has a strong track record of finding bigger profits even when the top line is weak. That's because of roughly $2 billion in stock buybacks authorized in 2012 and 2013 to reduce share count, but also a result of strong management and efficient operations. It's also due to continued consolidation via acquisition and investment in the few remaining tobacco companies — including a $4.7 billion investment in the Reynolds American Inc. (RAI) acquisition of Lorillard LLC to retain a 42% stake in the combined business.
British American Tobacco's entrenched position and strong profitability supports a dividend machine that is hard not to like. And with payouts at about 65% of earnings, this income stream is not going away anytime soon.
- Ticker: CVX
- Sector: Energy
- Market Cap: $190 billion
- YTD Performance: +13%
- Dividend Yield: 4.2%
Chevron Corp. has steered around oil stocks' slide, with a double-digit gain since January and a huge snap-back from its summer 2015 low.
Chevron remains one of the world's largest energy companies and isn't going anywhere, even if crude oil has had a rough run. Moreover, oil prices have been firmer, with crude jumping from lows around $30 at the start of the year to the mid-$40s currently.
Plus, Chevron generated $20 billion in operating cash flow last year; the company is sitting on almost $35 billion in cash and investments, and it pays a highly sustainable 4.2% dividend.
- Ticker: GSK
- Sector: Pharmaceuticals
- Market Cap: $105 billion
- YTD Performance: 7%
- Dividend Yield: 6.8%
Investors' concern about expiring patents on legacy drugs continue to create headwinds for big pharmaceutical companies. Potential buyers worry that a lack of growth will pretty much doom these investments to chronic underperformance.
But GlaxoSmithKline has a lot to offer long-term investors in the form of a stable suite of products, a decent product pipeline for the future, and a robust dividend.
GlaxoSmithKline stock has been in big trouble for two years or so in the wake of a bribery scandal in China and a roughly $500 million fine. But with shares down about 25% from their early 2014 highs, Wall Street is being overly negative. Revenue is growing by low single-digits, and profits are expected to rise about 9% in fiscal 2016, thanks to efficiencies as part of a reorganization announced in December 2014.
What's more, GlaxoSmithKline sports a 6.8% dividend based on its last four quarterly payouts. And even if you take the smallest quarterly distribution over the past year — 55 cents a share paid in the fourth quarter of 2015 — the stock's still delivers an impressive 5.1% yield.