For those investors who think stocks are no longer a quality source of income, the opposite is true today. Stocks, at this juncture, may offer the best opportunity for income relative to any other asset class. And the idea that stocks are too risky is not necessarily correct if you think rationally.
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Most investors who shun stocks and instead choose to park their funds in five year certificates of deposit (CD) at a bank, or any other time defined instrument, have committed to locking up their money for a period of years. If the same time frame is applied to holding a stock, then the income you will earn from these securities will vastly exceed any return that can be made from a bank CD, U.S. Treasury security, or other various fixed income products. Somewhere along the lines, investors lost sight of what stock ownership means. Investors need to be realistic: stocks are meant to represent fractional ownership interests in a business and should be held for years, not months.
An Array of Options
Investors have an array of high quality income producing stocks. Consider Brookfield Infrastructure Partners (NYSE:BIP). Shares currently yield 5.3%. Brookfield owns high quality infrastructure assets like utilities, electricity transmission lines and energy pipelines. These assets are like toll bridges: they provide a necessary service that generates consistent cash flows. The high dividend is a reflection of the consistency of the cash flow. And, shares trade at a very attractive $26, or 7 times earnings, suggesting that equity upside is highly likely over the next several years.
The Coca-Cola Company (NYSE:KO) can be bought today for a yield of 2.8% at 12.4 times earnings. Owning Coke shares and getting almost 3% a year seems very attractive in this low rate world. Consumers aren't going to stop drinking Coke, so the stock will likely do well over the next several years as well. In that same spirit, Kraft Foods (NYSE:KFT) is also a great income stock that will ensure safety of principal over the years. Kraft yields 3.2%, a dividend that can be counted on for years. (For related reading, see The Power Of Dividend Growth.)
Yielding over 9%, energy MLP Breitburn Energy (Nasdaq:BBEP) is another worthwhile consideration. Most yields that high are a signal that the market has doubts about their sustainability. Yet BBEP has been a consistent income provider. During the recession of 2008, the payout took a hit as the company needed to restructure the balance sheet. But it wasn't long until the payout was restated and increased. Trading at $17.60 a share, BBEP also trades at 75% of book value.
The Bottom Line
Companies with a long history of dividends have been very rewarding to investors over a period of many years. Anyone with a multi-year holding period can earn significant annual income along with principal appreciation from stocks today. Patience, indeed a virtue, pays well in the stock market.
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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.