One of the most difficult tasks for investors in this age of eternal quantitative easing is finding suitable income investments. The stock market has provided an excellent source of dividend income during its very broad-based advance. But as I have said repeatedly over the past few weeks, there are signs that the market advance is going to narrow and investors will have to be more careful in stock selection — even for the dividend-paying stocks that make up the income portion of your portfolio.
Fortunately we have a valuable tool at our disposal to identify winning stocks. Using Portfolio Grader I looked at buy-rated stocks in the S&P 500 that yield more than 4% and have the potential to navigate the bumpier markets I see developing. While many of the higher-yielding stocks are seeing deteriorating fundamentals and a slipping quantitative grade as buying pressure abates, I was able to find some high-quality stocks that would be solid additions to a portfolio of income stocks.
Healthcare REIT (NYSE:HCN) was just upgraded to our best-of-the-best “A” ranking in March. This REIT invests in medical facilities such as senior living facilities, medical office buildings, and life sciences centers. The company has been posting impressive earnings gains, with a better-than-40% year-over-year increase last quarter and 35% gains over the past four quarters. The stock yields 4.2% at the current price and is a solid income portfolio candidate.
HCP (NYSE:HCP) is in the same business and is seeing the same solid results. Earnings were up more than 200% year-over-year last quarter and the REIT is poised to outperform expectations again this quarter. The shares yield 4.1% and were upgraded to an “A” rank by Portfolio Grader back in February. The healthcare sector continues to be strong, and this company will benefit as its office buildings and hospitals see increased demand and higher rental rates.
Utility stocks have always been a solid component of dividend income portfolios, but it is important to focus on those with the best fundamentals. Many of them are seeing fundamentals worsen — so be sure and buy only those with buy ratings as we go into earnings season. Right now Pepco Holdings (NYSE:POM), Duke Energy (NYSE:DUK), Public Service Enterprise Group (NYSE:PEG), and Southern Company (NYSE:SO) have yields over 45 and are buy-rated by Portfolio Grader.
Rounding out the current high-yielding portfolio list are two stocks that have buy ratings, solid yields and can offer some diversification as well. Seagate Technology (NYSE:STX) is in the data storage business and is not impacted by the same factors as healthcare and utility stocks. Cigarette maker Altria Group (NYSE:MO) has a long history of paying high dividends and increasing profits. Both have the type of solid fundamentals that make them buy-rated stocks.
The search for income stocks will get more difficult as the market advance narrows and volatility increases, so be sure and add only the best dividend-paying stocks to your portfolio.