When looking for dividend stocks to buy in this market, it’s not simply about watching yield.
There are plenty of ugly stocks that have seen their shares punished — and subsequently are “high-yield dividends stocks” as a result of lower prices.
But what good is a 5% or 6% dividend if the underlying shares lose your three times that across the next year?
There are also plenty of respectable dividend stocks that currently trade at inflated valuations as the market bounces around all-time highs.
Heck, Federal Reserve Chairwoman Janet Yellen herself said herself that stock valuations are “quite high” — so if you’re not worried about overpaying for a sleepy, slow-growth dividend stock then you’re just not paying attention.
In such an environment, it’s important then to look at a combination of factors to find the best dividend stocks. Sure, you want a great yield — at least 3.5% — but you also want strong share performance in the short-term and hopes of continued strength no matter whatever temper tantrums the market throws in the months ahead.
I’ve identified five such stocks here, with five unknown dividend stocks with surprisingly big yields. Take a look:
Scorpio Tankers Inc. (NYSE:STNG)
- Market Cap: $1.6 billion
- Sector: Energy services
- Dividend Yield: 5.4%
- YTD Performance: +6% vs. +2.6% for the S&P 500
An energy services stock on a list of dividend stocks?
I know, I know — tanker stocks are notoriously volatile, and investors who were burned a few years ago as the sector collapsed may have sworn them off forever. But hear me out on Scorpio Tankers Inc. (NYSE:STNG), which is up nicely year-to-date and offers a juicy and sustainable dividend.
Specifically, STNG stock pays 12.5 cents quarterly after a recent increase this year and is projected to earn 94 cents per share in FY2016 — giving it a payout ratio of about 55% if distributions remain constant across the next year or so.
The mere fact that the company is profitable is very noteworthy in an environment when many mid-cap energy stocks are suffering from the weak prices for both oil and natural gas right now.
It’s also noteworthy that just last week, on May 4, DNB markets upgraded the stock from “hold” to “buy” after a successful secondary offering of the stock raised almost $140 million. This money will help Scorpio plan for future growth while delivery of previous tanker builds are coming on-line right on schedule — with seven deliveries expected in the current quarter and really juice revenue and profits going forward.
Yes, the shipping market is incredibly competitive and rates can be volatile — particularly if there is excess capacity in the industry. But tanker stocks seemed to have learned their lesson, and Scorpio is in the right place at the right time in 2015 with its fleet. Investors can reap the rewards with a juicy and sustainable dividend going forward.
Memorial Production Partners LP (NASDAQ:MEMP)
- Market Cap: $1.4 billion
- Sector: MLPs
- Dividend Yield: 13.6%
- YTD Performance: +11% vs. +2.6% for the S&P 500
Memorial Production Partners LP (NASDAQ:MEMP) might be a surprising choice, given the current environment.
For the record: No, that dividend yield is not a typo at 13.6%. And no, neither is the share performance of this oil and gas partnership, which has enjoyed significant gains even as many energy stocks have been brutalized by weak energy prices.
In fact, in its recent earnings report just last week MEMP reported that production is ahead of guidance and costs are down. Specifically, average daily production was up 1% over last year and up an impressive 35% quarter-over-quarter as it has ramped back up. Also, lease operating expenses dropped 7% year-over-year at the same time
MEMP is also committed to growth — such as it is for an MLP. Acquisitions are a constant priority for Memorial Production partners, including the purchase of new wells and reserves in February and word in the earnings call that the company “has reviewed in some level, over $6 billion in transactions” with an eye on further expansion.
The energy sector is assuredly volatile right now. But you can hedge your bets big time with a high-yielding MLP like Memorial Production Partners.
Validus Holdings (NYSE:VR)
- Market Cap: $3.5 billion
- Sector: Insurance
- Dividend Yield: 3%
- YTD Performance: +1% vs. +2.6% for the S&P 500
Never heard of Validus Holdings, Ltd. (NYSE:VR)? Well, you’re not alone — because this boring mid-cap stock has been flying under the radar of many investors. That’s part of what makes it better than most dividend stocks.
Here’s what you need to know now: Validus is a relatively new property and casualty insurance company, formed in 2005 by private equity firms who thought they could capitalize in the aftermath of a particularly bad hurricane season 10 years ago that was one of the most active in recorded history — including 27 named storms, with Katrina and Rita the most infamous and devastating that year.
VR stock spun up quickly, and went public in 2007 … But then it had to deal with a different kind of disaster via the financial crisis. Still, the company stayed agile and is now soundly profitable and well-capitalized. Validus has some $8 billion in cash and investments over a $3.5 billion market cap, and is currently trading at a slight discount to book value.
On to the dividends: Validus pays 32 cents per quarter after a recent 2-cent increase to start 2015. That comes out to a 3% yield annually. But equally impressive is that the dividends run alongside an ambitious $750 million stock repurchase effort, which is roughly 20% of outstanding stock at this valuation!
A growing dividend, and ambitious repurchase plan and hopes of a higher interest rate environment that may boost net interest margins on its investment of insurance premiums all adds up to a very bullish case to be made for Validus.
Six Flags Entertainment Corp. (SIX)
- Market Cap: $4.4 billion
- Sector: Consumer discretionary
- Dividend Yield: 4.4%
- YTD Performance: +10% vs. +2.6% for the S&P 500
Thanks to a resurgence in consumer spending over the last year or so and an improving labor market, the timing is perfect to purchase theme park giant Six Flags Entertainment Corp. (NYSE:SIX) before the busy summer travel months deliver the lion’s share of business to this discretionary spending play.
Of course, there are many ways to play consumer spending. But the real value SIX stock provides is a tremendous dividend via its 52-cent payout — which was just boosted 11% from 47 cents previously — and a previously-approved $500 million stock repurchase plan that delivers even more capital back to shareholders.
This comes after the fifth-consecutive fiscal year of record stock performance for Six Flags – including rising visits as well as rising spending per capita on park grounds. More recently, Q1 numbers showed a 19% jump in revenue year-over-year that beat expectations nicely.
Like many seasonal stocks, Six Flags operates at a loss in the off season and banks most of its profits in a short period. For SIX, that season is just starting — with Q2 projections of 61 cents a share and Q3 projections of $1.66 per share not just accounting for all the profits but actually offsetting the expenses of other periods.
As of this writing, SIX stock was up 2% just on the dividend news. That means if you want to ride the optimism and buy in to SIX, now is the time to do it — rather than after another earnings beat sends shares out of reach and reduces your yield as a result.
Darden Restaurants, Inc. (NYSE:DRI)
- Market Cap: $7.9 billion
- Sector: Consumer Discretionary
- Dividend Yield: 3.4%
- YTD Performance: +9% vs. +2.6% for the S&P 500
Maybe you’ve heard of Darden Restaurants, Inc. (NYSE:DRI) and know it as the brand behind big-time restaurant chains that include the Olive Garden and Longhorn Steakhouse. But did you know that it’s also a dividend darling, with a yield that is pushing 3.5% right now?
Also of note is the dividend growth, as dividends have more than tripled since 2008 — from 18 cents to 55 cents — despite an undoubtedly challenging environment across the Great Recession.
Critics will say that DRI stock hasn’t gone anywhere — but they haven’t been watching it lately. While shares were stuck around $50 from late 2010 all the way through late 2014, Darden has found its footing to tack on 20% since October — compared to the 4% gain for the S&P 500 in the same period.
The cause? Significant improvement in the company’s fundamentals, including a March earnings report that trounced expectations with 99 cents in adjusted earnings per share vs. a forecast of 84 cents and revenue that was up 7% year-over-year.
Another sign of optimism is the appointment of a new CEO in Eugene Lee. Lee is a high-energy exec with more than 30 years in the restaurant biz and a mandate to continue the evolution of Darden after the selloff its Red Lobster seafood and Smokey Bones barbecue arms. He’s looking to evolve with a new brand of specialty restaurants like Seasons 52 — a fine dining establishment that specializes in premium wine by the glass and only offers low-calorie menu items.
The dining public can be fickle, but the strong financial results and the continued rejuvenation of Darden under a new CEO could be a great play in your dividend portfolio considering its 3.6% yield at current pricing.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.