Regardless of what one’s opinions are towards the U.S. Federal Reserve possibly raising artificially suppressed interest rates, one thing is clear: The markets are spooked.
As noted by Michael Santoli of Yahoo Finance, the mostly stable stocks comprising the S&P 500 index have done virtually nothing since mid-September of last year. Given the lackluster environment in the markets, has the bullish rally finally petered out?
Ever since the S&P 500 returned more than 26% on a year-to-date basis in 2013 — setting a multi-year high in the process — momentum among traditionally stable stocks began to wane considerably. With the support of easy money from the Fed’s quantitative easing program widely anticipated to end, investors voted with their wallets and gradually made their way to the exits.
The commodities and energy crisis, along with the recently popped bubble in the Chinese financial markets, have put even more pressure on American blue-chips. The S&P index is currently down 4% YTD; if the negativity holds, this would be the first time the markets have gone red since 2008.
It’s apparent that opportunities for clear capital gains plays are diminishing. Rather, investors may be best served by considering stable stocks with generous dividend yields. Here are three companies that have solid foundations and currently feature dividend yields in the range of 5%.
Stable Stocks: AT&T (T)
Dividend Yield: 5.7%
Telecommunications giant AT&T Inc. (T) could be considered the one of the kings of stable stocks, especially when comparing scars from the ghosts of volatility past.
Back during the global meltdown of 2008, AT&T shares dropped 24.5% — a steep loss, yes, but a far cry from the 34% drop in the benchmark S&P 500. Against the most recent broad market correction which began on Aug. 18, T stock is down just 5% whereas the S&P index is down 7%.
On the flipside, when the broad markets have rallied, T stock has mostly been overshadowed by high-flying cyclical companies. Between 2009 and 2014, AT&T returned an average of 9.5% annually, whereas the S&P returned more than 13% over the same time period.
But with so many financial sectors seeing red this year, T stock’s dividend yield of 5.75% is hard to turn down.
Adding further encouragement, AT&T has consistently paid out dividends on a quarterly basis since at least 2000, while gradually raising the average quarterly dividend from 24 cents per share to the most recent rate of 47 cents. That’s a 93% increase in the DPS rate, while the equivalent rise on the equity itself was only 67%.
Admittedly, boring companies like AT&T don’t generate much fanfare, but in times of uncertainty, T stock’s high dividend yield is as good as gold.
Stable Stocks: Southern Co. (SO)
Dividend Yield: 5.1%
Despite being underwater by over 13% YTD, utilities mega-firm Southern Co. (SO) can still be considered one of the more stable stocks in the blue-chip indices.
Speculative trading rapidly drove up SO stock’s value early in the year, with the rally coming unglued by the end of January. Nevertheless, Southern Co. shares are inside 3% of its 50-day moving average.
Like AT&T, the big play for SO stock in the current financial environment is its dividend yield of slightly more than 5%. Over the past 16 years, Southern Co. has treated its investors well, paying out dividends consistently on a quarterly basis, and raising the DPS rate from a lowly 20 cents to the most recent rate of 54 cents.
But what makes Southern Co. stand out from other stable stocks with high dividend yields is that SO is also a capital gains opportunity as well.
Equity research firm Argus reaffirmed its “buy” recommendation for SO stock, believing that Southern’s recent acquisition of AGL Resources Inc. (AGL) — making Southern the second-largest utility company in the U.S. — is an all-around positive transaction. Argus‘ price target for SO stock is $50, which represents a healthy 16% profit from current market value.
With a lofty dividend yield combined with potential equity upside, SO stock is worth keeping on your watch list during this bearish environment.
Stable Stocks: Philip Morris International (PM)
Dividend Yield: 4.9%
No discussion on stable stocks with high dividend yields would be complete without mentioning Big Tobacco.
Focusing on earnings growth, tobacco companies are notorious for cutting costs wherever necessary to be able to provide above-average dividend yields. In fact, Philip Morris International Inc. (PM) decided to gauge demand for its Indonesian subsidiary — a deal that could ultimately be valued as much as $1.9 billion.
The attempt to gauge interest may reflect some deeper challenges for Philip Morris and the rest of the tobacco companies. Cigarette smoking has declined in popularity in the U.S. and western Europe and recent economic weakness in the emerging markets may hamper expansion plans.
The YTD-performance of PM stock has dramatically declined in the three years between 2012 and 2014, averaging 4.4% returns. In contrast, YTD-performance in the prior three years averaged 28.2%.
Nonetheless, Philip Morris’ offerings of generously expanding dividend yields has been enough to keep investors coming back for more. Since the middle of 2008, the company has faithfully paid out quarterly dividends, rising from 46 cents to its present rate of $1.05 per share.
While having little to no discernible upside potential, Philip Morris has an “investor-first” focus — and that bodes extremely well for dividend yield seekers looking to reliably beat the returns of lethargic blue-chip indices.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.