For income investors — particularly those nearing retirement — dividend stocks have always been an important part of their portfolios. And the underlying value proposition won’t fade away simply because the Fed’s “tapering” will lead interest rates higher. But a rising rate environment will force investors to scrutinize those dividend stocks more carefully — and not all of these “dull darlings” will make the grade.
First, the good news: Dividend stocks boast the benefit of providing reliable payments that can be reinvested, and many top dividend stocks — particularly utilities — are mature and stable, so they and offer a hedge of protection in times of volatility. The bad news: Many of the most stable dividend stocks have been seriously overbought in recent years by investors seeking a safe haven from tough economic times.
But there are still some stable, yet affordable stocks that offer an attractive dividend yield. In picking our dividend stocks, I’m focusing on these three criteria: A dividend yield of 3% or more, a beta lower than 0.8 (which theoretically indicates that the stock is 20% less volatile than the broader market) and a price-to-earnings (P/E) ratio that is below its five-year average.
Here are three stable, dividend stocks that should keep running strong for a while longer and would make great additions to any retirement portfolio:
Market Cap: $182.6 billion
Dividend Yield: 5.2%
When it comes to dull, dividend darlings, AT&T (T) stock is in many ways the prototype: high dividend yield, low volatility and a price-to-earnings (P/E) ratio that is lower now than its five-year average.
The key measurement of volatility is beta — stocks with a beta of 1 are said to move with the market. A beta of greater than 1 indicates a stock that is more volatile than the broader market, while a beta of less than 1 is less volatile than the market. As the Grande Dame of the mature telecommunications industry, T stock has a beta of only 0.29 — dramatically less volatile than the broader market.
AT&T also continues to grow its enterprise communications business, with a particular focus on providing high-end cloud and other business applications to its global customers. The company is in a dust up with consumers over plans to nix its landline telephone services in favor of wireless, but it’s only a matter of time before the company migrates customers to that less expensive infrastructure.
Besides the high dividend and low beta, there’s more to the equation than yield and stability. T stock has a P/E of only 10.5. That’s dirt-cheap considering that the average P/E for T stock over the past five years is 21.1.
Shaw Communications (SJR)
Market Cap: $10.9 billion
Dividend Yield: 4.1%
Shaw Communications (SJR) is one of the largest telecom companies in Canada, providing triple-play (telephone, Internet and TV) services, as well as direct broadcast satellite operations.
While traditional telecom stocks are not growth plays in the U.S., niche opportunities remain in Canada. SJR stock benefits from the company’s particular focus on Western Canada. In fact, it’s kind of a gift with purchase for this dividend stock, because services growth in Alberta is likely to outpace that in other Canadian provinces.
Even so, SJR stock has a beta of only 0.45, and while a P/E of 15.6 is not aggressively lower than its five-year average P/E of 16, lower is still lower. And when you compare SJR stock’s P/E to the S&P 500’s 17 — or the industry average of 23.5 — SJR stock still comes out smelling like a rose.
Dominion Resources (D)
Market Cap: $41 billion
Dividend Yield: 3.4%
Public utility companies, with their stable base of ratepayers, have long been important for investors seeking dividend yield. That said, Dominion Resources (D) is also a play on growth. The company also is diversifying its power-generation portfolio by buying into six solar projects in California.
D stock is the epitome of a stable investment, with a puny beta of only 0.05. But as investors fled tough economic times for safety and stability, many of these low-beta stocks have become extremely overbought. Consider Dominion’s market peer, Pepco Holdings (POM), which has a P/E of 46.1 — more than double the industry average and far higher than its own five-year average of 24.3. However, D stock has a P/E of 22.4 — in line with the industry average and considerably below its five-year average P/E of 32.
So if you’re looking load up your retirement portfolio with stable dividend stocks (and you should be), it’s tough to beat these three picks.
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As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.