With the low-interest environment currently holding still and expected to continue to hold for the foreseeable future, many investors wonder where to put their cash. Most savings accounts, money markets and CDs are all paying interest rates that mimic the low-interest standards found in treasury bills. Indeed, investors have to look hard to find yields as high as 4 percent, as the 10-year T-bill was yielding 3.54% near the end of 2009.
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Stocks For Yield?
Though some investors are strictly bond or income investors, for a diversified investment mix it's still good to consider some stocks, even for the most conservative investor. Although income investors can and do seek higher-yielding instruments than CDs, money market accounts or T-bills - such as corporate or even high-yield junk bonds - why not consider dividend-paying stocks for income? Dividends are a time-honored way for income investors to get more yield without embracing high risk.
Utilities Still A Dividend Tradition
Utility stocks, with their slow-growth, regulated businesses, have traditionally been sought after by income investors. The traditional "widow and orphan" stocks, while perhaps not as safe or completely dull as they once were, can still be stable sources of cash flow for investors. A batch of well-managed utility companies can lend solid income to an investor's portfolio. (For related reading, see Trust In Utilities.)
A selection of high quality companies, such as electric utility Southern Co. (NYSE: SO), which was recently paying a 5.3% dividend while trading at a P/E ratio of roughly 16, can be part of a small batch of income stocks. The company operates in the Southeast and has had fairly stable earnings throughout the recession. Midwestern electric utility FirstEnergy (NYSE: FE) was paying a 4.69% dividend near the end of 2009, a yield still higher than the 30-year bond. Though its earnings are flat, First Energy has fought through the recession in the Midwest well.
Other Strong Utilities
Consolidated Edison (NYSE: ED), the large New York utility, was paying 5.2% and remains a strong company. Its stock was selling at a P/E of 15 and has reasonable growth potential. Duke Energy (NYSE: DUK), which is a multi-line utility with both gas and electric, was yielding 5.52% recently. Though growth prospects for this diversified company look flat, it's still a historically well-run outfit. Add to this a pure natural gas utility, WGL Holdings (NYSE: WGL), with its business centered in the Atlantic Coast region, and you have a decent geographical mix to invest in. WGL was paying a 4.36% dividend, traded at a multiple just over 14 and has mild growth prospects. (For related reading, check out Utility Funds: A Bright Choice In Bear And Bull Markets.)
Growth As A Kicker
With some of these stocks, the additional feature is that they have some growth potential, though that obviously isn't their main attraction for income investors. For income investors, it's a bonus. Still, these companies do target growth as well as often attempting to increase their dividend payouts. So this combination of factors, along with the relative safety and stability of these companies, as well as their lack of volatility in their stock prices, can be attractive for income investors.
Dividends - The Market's Open Secret
Income investors might also look at real estate investment trusts (REITS), which trade like a hybrid between a stock and a bond, or look at many other utility and even industrial or other stocks that pay generous dividends. Other investors, too, should consider or at least be aware of the dividend's potential value for adding significantly to long-term returns in the market. Many established well-known companies, such as McDonald's (NYSE: MCD) and AT&T (NYSE: T), are also historically good dividend payers. And when one of these companies combines its dividend return with strong earnings growth, investors often get a surprisingly good one-two punch of returns. (For more, check out Dividend Yield For The Downturn and Dividend Facts You May Not Know.)
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