by Dan Burrows | April 11, 2014 10:30 am
It’s hard to beat dividend stocks like real estate investments trusts (REITs) and master limited partnerships (MLPs) for high dividend yields, but since those payouts flow directly from earnings, their income streams can be volatile. (Hey, as with everything else in investing and life, there’s no such thing as a free lunch.)
That’s why it’s important to diversify your holdings in high-yield dividend stocks with some dependable straight-up corporate payers, too — preferably ones that add plenty of price appreciation. After all, income is only half of the equity-income equation.
Sure, if you’re content to take a generous stream of income without the chance for price appreciation you can always buy bonds and hold them to maturity. But price appreciation is where the real money is made, so you’re missing out if you don’t own at least some stalwart large-caps that pay high dividends with good track records on price.
That’s why we searched for dependable large-cap stocks sporting dividend yields of at least 5%. Furthermore, these dividend stocks had to outperform the S&P 500’s total 1-year return of 21% by at least 5 percentage points.
That left us with dividend stocks that have been total return monsters. Between dividends and share-price performance, these stocks have put up market-crushing gains and could very well have more to come:
Dividend Yield: 5%
1-Year Total Return: 26%
Reynolds American (RAI) is having a fine time on price alone, rising 20% over the past 52 weeks. That beats the S&P 500 by a couple of percentage points. Add in this tobacco company’s dividend, however, and the outperformance widens to something special, beating the broader market by more than 5 points.
Perhaps the most attractive aspect of RAI stock is the way it almost relentlessly hikes its dividend. It will pay $2.68 a share in dividends this year, up from $2.48 in 2013. And that was up from $2.33 paid in 2012. Indeed, the RAI stock dividend has grown 182% in the past 10 years.
At the same time, RAI is forecast to have strong earnings growth this year and beyond. Wall Street expects earnings per share (EPS) to expand 6% in the current fiscal year, and by more than 8% in 2015. That should be more than enough growth and income to drive more total return outperformance this year and beyond.
Dividend Yield: 5.1%
1-Year Total Return: 41%
French oil-and-gas giant Total (TOT) is putting up gains that should make ExxonMobil (XOM) blush. Price appreciation plus dividends has TOT stock putting up a 1-year total return of 41%. On the same basis, XOM is poking along at 13%, lagging the broader market by a wide margin.
The big difference between Total and some domestic energy majors is that Total is offering investors better growth in both production and cash flow, helped by new projects, ramp-ups on existing projects and an aggressive cost-cutting program.
Indeed, while other energy majors are scaling back and selling assets, TOT is investing in its upstream portfolio, with new or accelerating efforts everywhere from Africa to Canada. That should keep Total’s total returns flowing.
Dividend Yield: 7.4%
1-Year Total Return: 58%
Blackstone (BX), the private equity giant, isn’t off to a great start in 2014. On a price basis, BX stock is down about 3% for the year-to-date, getting hurt with the rest of the risk-off market. But it’s hard to see that trend lasting.
It’s not as if the Blackstone cash machine is running out of bills. A disappointing initial public offering of La Quinta Holdings (LQ) saw shares snap back the following session — in a down market. That IPO came less than a week after BX bought auto-parts maker Gates Global for $5.4 billion — the largest private-equity buyout of an industrial company in more than four years.
Between the almost gluttonous dividend yield of 7.4% and Blackstone’s solid track record of essentially printing money, shares are sure to return to their total-return winning ways. Even with the recent underperformance, BX stock has a 1-year total return of 58%.
Dividend Yield: 7.4%
1-Year Total Return: 47%
Banco Bilbao Vizcaya Argentaria (BBVA) is a Spanish banking giant generating outsized total returns after a long period of being kicked to the curb by the market. BBVA can mostly give thanks to a healthier Europe, but there’s more to it than that.
Like competitor Banco Santander (SAN), BBVA gets the vast majority of its profits overseas, notably in Latin America. In BBVA’s case, it has a leading footprint in Mexico, where gross domestic product is expected to accelerate from as much as 4% this year to 4.2% in 2015. BBVA also has extensive operations in the hot economies of Chile, Colombia and Peru.
The market also likes the fact that BBVA is rapidly growing the profits it derives from operations in the U.S. and Asia, which will further shelter it from any more tremors in Europe. Always its strong suit, BBVA’s geographical sprawl bodes well for long-term outperformance.
Dividend Yield: 9.5%
1-Year Total Return: 55%
Orange (ORAN), the French telecommunications giant, is growing earnings even as it struggles with top-line weakness. Not that the market seems to care much about the latter.
Cost cutting and shedding underperforming assets can get a company very far in days when revenue growth is so hard to come by. That goes double when the assets being shed put ample cash in Orange’s coffers — like the $1.4 billion it pocketed selling its Dominican Republic subsidiary.
It also helps that Orange has accelerated its rollout of 4G network services in France and Spain, leading it to capture market share (paid for, in part, with proceeds from asset sales). Between cost cuts and expanding 4G market share, earnings per share are forecast to grow 35% this year, and that should help fuel more outsized total returns.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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