While human nature compels many investors to seek out wave after wave of glamorous growth stocks or newsworthy story stocks, the reality is that the most impressive long-term returns are often generated by relatively boring, yet profitable, companies. Among that cohort, many of the more well-established companies consistently pay out sizable dividends to their shareholders.
Indeed, while stable companies that consistently pay dividends have been traditionally labeled "widow-and-orphan stocks," the fact of the matter is that they are not only suitable, but also desirable, for the equity portfolios of many different types of investors. (To learn more about the benefits of dividends, check out Dividends Still Look Good After All These Years.)
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Dividends Make the Difference ...
Dividends offer many important advantages for individual investors. First, the obvious advantage of a regular income stream from dividend receipts should not be trivialized. Not only can it serve as a useful source of income, if reinvested continually over long periods of time, dividends can compound to significantly contribute to a portfolio's long-term rate of growth.
As well, stocks that consistently pay sizable dividends are often subject to less share price volatility than those that don't. Not only does this reduce the downside risk of an individual investor's portfolio, it also provides peace of mind. This is an important advantage, as the emotional security of regular dividends can prevent an investor from succumbing to panic and compounding their losses by selling their holdings at the wrong time. (For more on this, check out How Dividends Work For Investors.)
... Provided They Don't Disappear
That said, should the dividend payouts that provide all those advantages be decreased or eliminated by a company's board of directors, the benefits will go away right along with them. When searching for dividend-paying stocks to buy, a key factor for consideration is whether or not a company generates earnings sufficient to continue paying its regular dividends to shareholders.
While it's impossible to predict the future, by focusing your attention on those stocks that currently have positive earnings per share, and are expected to increase their income in the future, you are likely to reduce your chances of buying a stock whose dividend will end up being reduced or eliminated. On that note, here are five stocks currently offering relatively high dividend yields, but are also expected to increase their annual earnings in their next full fiscal year.
|Company||Market Cap||Forward Dividend Yield||Expected EPS Growth (YoY)|
|Deluxe Corp. (NYSE: DLX)||$900.0 M||5.5%||26.2%|
|Lorillard, Inc. (NYSE: LO)||$11.4 B||5.3%||13.5%|
|BGC Partners, Inc. (Nasdaq: BGCP)||$466.9 M||10.9%||51.3%|
|R.R. Donnelley & Sons Company (NYSE: RRD)||$3.3 B||6.4%||3.7%|
|BCE, Inc. (NYSE: BCE)||$23.9 B||5.7%||11.2%|
|Data as of Market Close August 19, 2010|
Lorillard Worth a Look
Lorillard provides a good example of this type stock. The company has been around for generations (it was founded in 1760), operating in what is certainly a stable, well-established industry: cigarette manufacturing. Lorillard currently pays annual dividends of $4.00 per share, which represents a dividend yield of 5.3%, given that the stock is currently trading in the $75 range.
A 5.3% annual dividend yield should be attractive to investors given that short-term interest rates remain low, especially since the cigarette industry is certainly one of the more secure types of businesses to invest in. There should be no problem continuing to pay that dividend going forward, as the company is expected to earn $6.54 per share for its fiscal year 2010, representing a 13.5% increase from 2009, with further earnings growth up to $7.13 currently expected for 2011.
Despite this outlook, the stock is currently trading cheaper than rivals such as Reynolds American (NYSE: RAI), which presently sports a trailing P/E ratio of 16.6 compared to Lorillard's 12.2. This lower valuation is not readily explainable by poorer operating performance, as Lorillard's trailing operating margin of 44.6% is significantly superior to Reynolds American's 30.3%, and far above the industry average of 33.3%.
With such strong operating performance, a solid outlook, and the stability of dividends, Lorillard is definitely worthy of follow-up research for investors looking to add a dividend-paying stock to their portfolio. With a beta of only 0.45, the company's shares have definitely been subjected to less volatility than the overall market thus far.
The Bottom Line
While any given dividend-paying stock could turn out to underperform the market average, especially if its dividends end up being reduced or removed entirely, an entire portfolio of dividend-paying stocks is likely to exhibit less volatility than the overall market. Drilling down beneath the surface, stocks that offer a solid dividend yield combined with positive earnings outlook, as the case appears to be the with Lorillard, are even more likely to end up producing healthy returns than the average dividend-paying stock.
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