High-dividend stocks come in all shapes and sizes, but any investor who is serious about income also knows that big dividends aren’t the only thing that matters.
Take RadioShack (RSH), a high-dividend stock that paid 50 cents in dividends in 2011 — good for a roughly 5% yield. Since then, shares have slumped from $10 to under $1, and the dividend has been axed.
So much for that investment.
Rather than chase investments that have tremendous but unsustainable yields, income investors should find the best high-dividend stocks that balance the inherent risk of equities along with a decent reward in the form of regular and sustainable dividends.
To help you zero in on stocks that are a great balance of income potential but also low-risk, rock-solid plays for the long term that you can believe in, here’s a list of seven high-dividend stocks:
High-Dividend Stocks – Microsoft (MSFT)
Market Cap: $370.7 billion
Dividend Yield: 2.5%
Microsoft (MSFT) recently announced it will lay off 18,000 employees over the next year, resulting in $1.6 billion worth of restructuring charges.
But while the numbers are large, representing about 14% of MSFT workers, investors seem very encouraged by the news — both because of the cost-cutting potential, and because it’s a signal that new CEO Satya Nadella isn’t afraid of making hard choices to revamp the tech giant.
This is just the latest way Microsoft is trying to grow and adapt — with previous big moves including a massive reorganization announced in 2013, followed quickly by news that CEO Steve Ballmer would be stepping down.
Shares have been perking up over the last year or so ever since this new attitude at MSFT, with the tech stock up more than 40% in the last 12 months vs. just 17% for the S&P 500.
The company pays a decent 2.5% dividend to boot, which is just about a third of earnings and includes plenty of room for increases … even when you don’t account for the massive $100 billion in cash and investments Microsoft has laying around. So while the yield is roughly on par with 10-year Treasuries right now, MSFT could join the ranks of high-dividend stocks in a hurry with brisk growth in its payouts over the next few years.
High-Dividend Stocks – HCP (HCP)
Market Cap: $19.3 billion
Dividend Yield: 5.2%
One of my favorite rock-solid investment themes is healthcare, what with the aging baby boomer population driving up demand and Obamacare providing insurance to millions of new “customers” that can now seek treatment.
And with a dividend yield of 5.2% and a great balance sheet, HCP (HCP) is one of the top high-dividend stocks in the healthcare sector.
As Dan Burrows recently pointed out, HCP has a very low beta — meaning it moves less than the market at large and is characterized by low volatility, even if the S&P 500 is making big swings.
Structured as a real estate investment trust, or REIT, HCP has the mandate to deliver at least 90% of its taxable income back to shareholders in the form of big dividends. But thanks to its focus on healthcare-related real estate — namely, senior housing and medical office space or acute care facilities — HCP also has the stable staying power of a healthcare stock.
HCP’s stability and dividend potential provide a win-win situation.
High-Dividend Stocks – Wells Fargo (WFC)
Market Cap: $269.8 billion
Dividend Yield: 2.7%
Wells Fargo (WFC) recently just topped my list of big bank stocks to buy now, mostly because of its bulletproof balance sheet when compared with peers like Bank of America (BAC) and Citigroup (C) and the hopes of better lending ahead in the second half of 2014 and into 2015.
But while I think there is short-term strength thanks to the hopes of a recovery in lending, WFC stock also offers tremendous long-term potential thanks to its stability and dividend growth.
This major bank fell during the financial crisis with the rest of the sector, but quickly made back its losses and started setting new all-time highs in 2013. Furthermore, its current dividend of 35 cents per share each quarter is actually higher than the 34 cents it paid in 2008 right before the mortgage meltdown and Federal Reserve intervention forced Wells Fargo to slash payments.
WFC stock has proven itself since the financial crisis, and investors can have great confidence in this bank stock going forward, too.
High-Dividend Stocks – Exxon Mobil (XOM)
Market Cap: $447.1 billion
Dividend Yield: 2.7%
Exxon Mobil (XOM) is an old favorite among high-dividend stocks low risk, a wide moat and stable operations. But right now, it is also benefited from the “risk premium” in energy prices thanks to unrest in the Middle East and Ukraine.
And longer-term, as the global economy continues to gather momentum and energy demand rises, XOM stock will continue to cash in.
The underperformance of Exxon over the last few years is, of course, noteworthy; since summer 2009, Exxon stock has barely tacked on 50% while the S&P 500 is up more than 125%. And even in 2014 that underperformance has persisted, with XOM stock up just 3% year-to-date — less than half of the broader index’s returns.
However, conditions are favoring this energy giant in the near term. And in the long term, there are fewer stocks with a more stable operation than Exxon Mobil. The company boasts annual operating cash flow north of $45 billion, is sitting on roughly $42 billion in cash and investments and has a very sustainable dividend payout ratio of around one-third of total earnings.
High-Dividend Stocks – Teva Pharmaceuticals (TEVA)
Another one of the best high-dividend stocks in healthcare is Teva Pharmaceuticals (TEVA), but I like it for very different reasons than the aforementioned HCP.
Teva Pharmaceuticals isn’t a household name like blue-chip drugmakers, and it isn’t a biotech darling like high-powered pharma stocks researching impressive new cures.
Teva is actually quite boring, really, as the world’s largest manufacturer of generic medications. After a big company has run its course with a patented medication, TEVA steps in and makes the same drug for cheaper and sells it for less to patients who need it.
The margins are thinner, but you can make up for this with scale — and with more than $20 billion in sales annually in all corners of the globe, Teva certainly has scale.
Now, there’s no breakout potential in TEVA stock since drug research isn’t really its game. But for low-risk investors, that’s a big plus — because unlike some other pharma stocks out there, patent expiration will never be an issue that weighs on its margins.
With a nice 3% dividend yield, too, TEVA stock has a lot to offer investors who are looking for solid and reliable income plays for the long term.
High-Dividend Stocks – 3M (MMM)
Market Cap: $94.7 billion
Dividend Yield 2.4%
3M (MMM) offers a nice mix of stability and growth potential, and thus is a good option if you want a low-risk play but don’t want to miss out on a continued recovery.
3M’s chemicals and polymers span all manner of businesses, including products from Post-It sticky notes to high-tech data center solutions to medical devices that help monitor a patient’s heart rate.
Also on the stability front, MMM stock has paid uninterrupted dividends since 1916 thanks to its scale and diversification — and that dividend is growing, too. In 2004, MMM stock paid 36 cents a share in quarterly dividends and now pays 85.5 cents — a 138% increase in distributions over the last decade.
Furthermore, even after these brisk increases, there’s enough cushion in 3M’s earnings to increase its dividends even more. Based on next year’s profit forecast, 3M is paying just 40% or so of earnings toward its dividend. No wonder MMM stock has been able to increase its dividend once a year for 57 years running, and currently yields 2.4%.
If and when the recovery gains momentum, all manner of chemicals and 3M products will be in higher demand, and the company should ride a cyclical recovery in spending. That means investors have a great mix of stability and growth in this blue-chip dividend stock.
High-Dividend Stocks – Johnson & Johnson (JNJ)
Market Cap: $290.0 billion
Dividend Yield 2.7%
Johnson & Johnson (JNJ) is an old favorite among defensive dividend stocks. It’s a healthcare play — but also a consumer staples play, thanks to popular brands including Band-Aid, Tylenol and Splenda.
Those two segments are the most bulletproof in all the market, and owning a leader in both staples and healthcare ensures a great foundation for your portfolio even in rough times. The healthcare angle makes JNJ stock pretty recession-proof, since medical expenses don’t go away even in tough times, and the company’s consumer-brand power gives it stability for the long run.
Many investors soured on Johnson & Johnson after the company struggled from 2010 to 2012 amid quality-control issues and big product recalls. However, since January 2013 the stock has outperformed the S&P 500 with 47% gains — and that doesn’t even count its nice 2.7% dividend yield paying back shareholders, either.
With a recent tailwind at its back and a long history of stability and income, JNJ is a great play for whatever comes your way in 2014 and beyond.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at email@example.com or follow him on Twitter via @JeffReevesIP.