It would be easy to go through a database of stocks, filter out the five highest-yielding ones, and whip up an article touting their income-generating prowess.
However, I’d be doing a great disservice to investors if I did.
It’s not always the case, but some companies dole out excessive yields because their stock prices are low or they have failing business models, or both. It’s a great way to lure in dividend-myopic investors who don’t read the fine print about earnings and cash flow.
It’s far better to seek out companies that pay a 2% to 3% dividend that intend to grow that dividend—and earnings—over time. Besides, if it’s outpacing inflation, there’s no immediate reason to get greedy.
Unfortunately, greed is as dirty a five-letter word as growth, when it comes to dividends. For example, investors in phone and Internet carrier CenturyLink (CTL) were caught off-guard in February 2013 when the company said it would cut its dividend by 26%.
Stocks with the best of both worlds
Shares of CTL fell 23% in response, the most they had in three decades, and $6 billion in market value evaporated. Although CenturyLink is still delivering a 6.8% dividend, the stock remained down 21% for 2013, and left plenty of doubt in investors’ minds.
The cut, made to promote a more flexible stock buyback program, raised the eyebrows of many analysts. It should raise yours as well; knowing that CEOs giveth and taketh away dividends at their own discretions.
If you need to generate income, it’s entirely possible to get the best of both worlds: companies that pay steady dividends and deliver growth to boot. Think this is just another too-good-to-be-true story? Think again.
Here are three stocks that do just that.
CA Technologies (CA) is involved in a rapidly growing and necessary part of IT. It’s called Data Center Infrastructure Management, or DCIM. Rather than go into eye-glazing detail about what it does, let’s just focus on this business’s staggering market potential. Fewer than 10% of mid- to large-sized data centers utilize it, and 451 Research says DCIM supplier revenue will reach $1.8 billion by 2016, representing a 44% compound annual growth rate.
While migrating away from mainframe services, ala IBM (IBM), CA Technologies, a $15 billion DCIM provider, is also focusing on growing its cloud market share. Cloud is estimated to become a $148.8 billion global market in 2014, $160 billion in 2015, and $207 billion in 2016. Known for having a strong pipeline and healthy financial books, CA Technology ended 2013 up 44% and the stock currently yields 3%.
This small-cap media company has the backing of the Russian government due in part to its owner Yury Kovalchuk’s longtime friendship with President Vladimir Putin. CTC Media (CTCM) also happens to operate three of the most popular television networks in Russia. Plus, it will take on a joint ecommerce project with Russia’s largest online retailer to launch a very in-demand line of women’s clothing in April 2014.
Thomson Reuters Stock Reports says CTC Media has one of the strongest balance sheets in its industry with net margins of more than 15% and a 12% return on equity. CTC Media is the perfect blend of growth and income: The company is forecast to grow 34% a year for the next five years, its stock rose 67% in 2013, and it delivers a 5.1% yield.
Here’s a small-cap regional financial company that reeks of long-term performance. Tompkins Financial (TMP) has shown profits, revenue and cash dividends for 59, 56 and 132 years consecutively. The company has increased dividends for 24 straight years. TMP even skated through the financial crisis in 2008 and broke profit records, so no worries here when it comes to lending practices. With the Fed promising to taper its monthly bond buying, interest rates are expected to rise and give regional banks more flexibility to up dividends…not that Tompkins needs that impetus to do so. TMP currently yields 3.2% and provided a comfortable 20% profits to investors in 2013. There’s no reason 2014 won’t mark the Tomkins’ 25th consecutive year of a dividend boost.