by Charles Sizemore | August 14, 2012 9:01 am
On Monday, I gave you five socially responsible dividend stock picks that you could feel good about owning. Now, we’re going to go in a different direction — I’m going to give you five delightfully naughty dividend-paying stocks to consider.
I’ll start with a confession: I love sin stocks, and I always have. Because they are politically incorrect, companies in the tobacco, alcohol and defense industries tend to trade at lower valuations and sport higher dividend yields than the broader market. In effect, they are perpetual value stocks, and investors with no qualms about investing in companies with social stigmas attached to them benefit from this pricing.
For a longer explanation on the virtues of being bad, see “The Price of Sin.”
As I’ve written before, not all sin stocks are created equal, and not all vice investments are strong dividend payers. But the following five stocks all pay current yields better than the market average, and many of them are habitual dividend growers.
Dividend Yield: 4.7%
I’ll start with a sin stock standard, American tobacco giant Altria (NYSE:MO). As the poster boy for Big Tobacco, Altria is probably the most hated company in history. If Altria were a movie character, it would be Darth Vader.
It also happens to be the most profitable investment in history, according to Jeremy Siegel’s The Future for Investors. Dr. Siegel’s calculation assumed the reinvestment of dividends, of course. And when you buy shares of Altria, you should accept that you are buying the stock specifically for its dividend because the company’s business is in long-term terminal decline. Cigarette smokers will continue to light up, but their ranks are not growing and cannot be expected to.
At current prices, Altria yields 4.7%. This is a little lower than I would normally like to see for a tobacco stock, but it still makes Altria one of the highest-yielding stocks in the S&P 500.
Dividend Yield: 3.2%
Some of the best values in the vice sphere are in the “merchant of death” category, and the next stock is one that I covered in “5 ‘Smart Money’ Dividend Stocks to Buy” as a stock owned by Magic Formula guru Joel Greenblatt: defense and aerospace firm Northrop Grumman Corporation (NYSE:NOC).
Northrop Grumman makes the sort of toys you might expect to see in a James Bond movie. Its aerospace division sells hardware and systems to government agencies for use in various mission areas, including intelligence, surveillance and reconnaissance, battle management, strike operations, electronic warfare, missile defense, earth observation and space exploration.
Northrop Grumman trades for just 9 times expected 2013 earnings and yields an impressive 3.2% in dividends.
Dividend Yield: 3.6%
Next on the list is one of Northrop Grumman’s competitors, Raytheon (NYSE:RTN). Raytheon offers integrated defense systems, including integrated air and missile defense, naval combat systems and intelligence systems.
Raytheon is priced comparably to Northrop Grumman, trading for just 9 times earnings, and it yields 3.6%.
The entire defense sector is attractively priced at this time, and Northrop Grumman and Raytheon are two excellent dividend stocks.
Dividend Yield: 2.5%
Moving down the list of all things naughty, we come to booze. And the single-best play in the world of spirits is British-based Diageo PLC (NYSE:DEO), the largest and most diversified seller of premium alcoholic beverages in the world.
Diageo’s brands include Johnnie Walker scotch, Smirnoff vodka, Baileys Irish Cream liqueur, Crown Royal Canadian whisky, Captain Morgan rum, Jose Cuervo tequila and many, many others. The company has been a long-time favorite of the Sizemore Investment Letter for its exposure to emerging markets; Diageo already gets 40% of its revenues from emerging markets, and this number grows every year.
Diageo is a current constituent of the Mergent International Dividend Achievers Index, meaning the stock has a long history of raising its dividend. It currently yields a respectable 2.5%.
Dividend Yield: 2.1%
Another stock in the alcohol sphere I like is Dutch mega-brewer Heineken NV (PINK:HINKY).
The global beer market is dominated by the Big 4 — Anheuser Busch InBev (NYSE:BUD), Heineken, SABMiller (PINK:SMBRY) and Carlsberg — though beer sales have been stagnant in the company’s core American and European markets. Sales are booming in emerging markets, however, and the Big 4 continue to gobble up small local brands with reckless abandon.
Heineken is unique among Western multinationals in that it is not only a great indirect play on rising incomes in the developing world, but it is a great play on the development of Africa in particular. Heineken already gets roughly a quarter of its revenues from Africa, and this percentage will only rise over time as the African middle class grows and develops.
Heineken pays a decent dividend of 2.1%.
Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. Sizemore Capital is long MO, DEO and HINKY. Sign up for a FREE copy of his new special report: “Top 3 ETFs for Dividend-Hungry Investors.”
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