Here’s a fun fact for you: The Japanese 10-year bond currently sports a negative yield and has for several weeks.
Stop for a minute and let that sink in. Investors are actually paying the Japanese Treasury for the pleasure of lending the country money. All of a sudden, the 1.9% bond yields on the American 10-year look pretty good by comparison.
That said, I can’t say that bonds of any stripe are particularly attractive. I’d really prefer not to lock up my capital at return that almost guaranteed to fall short of the inflation rate over time. I’d rather to try my luck with dividend stocks.
Sure, dividend stocks are riskier than bonds, and dividend payments — unlike bond interest — can be slashed at management’s whim. But at least with dividend stocks, you have the possibility of a rising income stream over time and capital gains to boot. I’d take the possibility of a decent return over the guarantee of a lousy one any day.
Today, we’re going to take a look at 10 dividend stocks to buy for the second quarter. Some will be what you might think of as “traditional” dividend stocks while others might be a little more off the beaten path. But all are decent stocks to own as we jump into a new quarter.
Dividend Stocks to Buy for Q2: Microsoft Corporation (MSFT)
Dividend Yield: 2.7%
I’ll start with a company that you might not normally think of as a “dividend stock,” tech giant Microsoft (MSFT).
Microsoft paid its first dividend a little over a decade ago, and it hasn’t looked back since. Microsoft has raised its dividend at a 9.7% clip over the past ten years … and a 16.8% clip over the past three.
At current prices, Microsoft yields 2.7%. That’s not a particularly high yield, but at Microsoft’s dividend growth rate it would give you a yield on cost comparable to the 10-year Treasury yield after just one year.
Microsoft is in the news this week on talk that the company might be one of the buyers of a spun-off Yahoo! Inc (YHOO) search business. We’ll see is anything comes of that. But the bigger news is CEO Satya Nadella’s transformation of the company away from the Windows-centric world of his predecessor Steve Ballmer. Rather than double-down on a platform in decline, Nadella is looking to the future and is remaking Microsoft as business cloud and services company whose biggest rival is actually internet retailer Amazon.com, Inc. (AMZN).
While Amazon has the first mover advantage here, don’t be surprised if Microsoft emerges as the ultimate winner given its deep relationships with enterprise IT departments. But come what may, Microsoft is clearly one of the best dividend stocks to buy in the tech sector.
Dividend Stocks to Buy for Q2: Prospect Capital Corporation (PSEC)
Dividend Yield: 13.9%
Some of my favorite dividend stocks are those that got hit the hardest last year by fears of the Fed raising rates. And business development companies like Prospect Capital (PSEC) are a fine example.
In order to maintain their tax status, business development companies are required to pay out substantially all of their profits as dividends, which is very good … and very bad. It’s good because investors get an outsized current dividend; it’s bad because business development companies never get to retain earnings for growth. They instead have to issue new shares or debt.
That became a problem last year. Fear of the Fed led investors to sell off the stock, which in turn made issuing new shares prohibitively expensive. Which caused frazzled investors to sell further. Before the stock bottomed out, it was trading for just 60% of book value.
Shares have rallied since then, but the stock still trades for just 72% of book value and yields a fat 14%. And sweetening the deal, PSEC pays its dividend monthly rather than quarterly.
Prospect Capital might not be one of your grandfather’s dividend stocks, but it’s a solid value and pays a high dividend you’re not likely to find elsewhere at a comparable level of risk.
Dividend Stocks to Buy for Q2: Kinder Morgan Inc (KMI)
Dividend Yield: 2.8%
Fallen pipeline stock Kinder Morgan (KMI) might seem like an odd choice for a list of dividend stocks. After all, Kinder made quite the ruckus last year when it slashed its dividend by 75% and opted to “self fund” its growth projects rather than issue new debt and put its credit rating at risk. KMI went from being a dividend darling to a dividend dud overnight.
Well, income investors shouldn’t be too quick to throw Kinder Morgan under the bus. The stock still yields a good 2.8% even after the dividend cut, and the company’s operations are stable.
Lost in the furore over the dividend cut is the fact that Kinder Morgan owns the country’s largest network of midstream pipeline assets paying out consistent, bond-like cash flows. Once KMI pays down its debt load a little more, I expect the company to return to its dividend-hiking ways. That day might be a year or so away, and the current yield of 2.8% is othing to sneeze at in this interest rate environment.
Oh, and it’s worth noting that David Tepper and Warren Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK.B) both took major positions in KMI last quarter at prices higher than today’s. We will have no way of knowing until the 13F reports are released in another month and a half, of course, but it wouldn’t be surprising at all if Tepper and Berkshire Hathaway have added to their positions in 2016.
Dividend Stocks to Buy for Q2: Enterprise Products Partners L.P. (EPD)
Dividend Yield: 6.4%
Along the same lines, I’d recommend Kinder Morgan’s largest rival Enterprise Products Partners (EPD). Enterprise Products operates the second-largest pipeline network in America with 49,000 miles of natural gas and crude oil pipelines. To put that in perspective, 49,000 miles would get you about a fifth of the way though a voyage to the moon.
Midstream MLPs were an unmitigated disaster for investors last year and for much of the first quarter this year. Investors discovered that, regretably, the midstream segment had more exposure to oil and gas prices than they had been led to believe.
Still, investors that sold their shares of Enterprise Products were short-sighted. EPD is one of the most conservatively-managed pipeline companies in the space, and the safety of its distribution has never been questioned. While many of EPD’s peers raised their distributions at a rate that was downright reckless at times, EPD took the approach that slow and steady wins the race. Enterprise has raised its dividend at a 6% annual clip over the past year and yields 6.4% at current prices.
Dividend Stocks to Buy for Q2: Cohen & Steers REIT/Pfd Inc Fd (RNP)
Dividend Yield: 8%
Stepping away from dividend stocks for a minute, I want to touch on a fund of good dividend stocks, the Cohen & Steers REIT & Preferred Income Fund (RNP). RNP is a nice collection of dividend-paying REITs and preferred stock that is trading at prices so good as to be almost unbelievable. RNP pays a current yield of 8.1%, and the fund has been steadily raising its payout since 2010.
RNP is a closed-end fund, which means that it has its quirks. Unlike a traditionaly open-ended mutual fund, RNP trades on the stock market like a stock. And as a result, its stock price can vary wildly from its underlying portfolio value. At current prices, RNP trades at a 15% discount to net asset value.
That means you are effectively getting a portfolio of solid income-producing REITs for just 85 cents on the dollar. This is the deepest discount since the 2008 meltodwn and its aftermath.
I have no real explanation for why RNP is priced the way it is. Frankly, the closed-end fund market is somewhat thinly traded, and the pricing in this space often drifts into absurd territory. It just comes with the turf.
Buy RNP and enjoy an outsized dividend while waiting for the market to regain its good sense.
Dividend Stocks to Buy for Q2: General Motors Company (GM)
Dividend Yield: 4.8%
Up next we have auto giant General Motors (GM). At current prices, GM is one of the cheapest stocks trading today. It trades for just 5.2 times trailing earnings and 5.4 times expected 2016 earnings. To put that in perspective, that prices at GM roughly one third the valuation of the broader S&P 500.
Now, I realize that GM operates in a brutally competitive and highly cyclical industry. Auto sales tend to fall off a cliff during recessions. And the industry faces other challenges too, such as an aging U.S. population and a younger generation that values car ownership less than past generations. But seriously … a P/E ratio of 5?
Even given the lousy economics of the industry, this price is ludicrous. At current prices, GM yields just shy of 5%, and the company has been aggressively raising it in recent years. Should auto sales do anything other than go into deep freeze, I would expect more dividend hikes to come.
Dividend Stocks to Buy for Q2: Ford Motor Company (F)
Dividend Yield: 4.6%
Along the same lines, I would recommend Ford Motor Company (F). Ford trades at a trailing P/E ratio of 7.1 and a forward P/E ratio of 6.4 based on expected 2016 earnings. Compared to GM, that almost sounds expensive. But by overall market standards, Ford is an absolute steal.
One underappreciated factor that I expect will keep auto sales higher than a lot of analysts expect is the age of the average American vehicle. Americans have become almost absurdly frugal when it comes to car ownership. The average age of a car on the road is now well over 11 years. That’s not the average life of a car before it gets scrapped, mind you. It’s the average age of cars currently on the road. So roughly half the cars on the road are older than that. To put that in perspective, the average age was 8.4 years in 1995.
Granted, cars last longer than they used to, and quality really has improved over the years. Still, that’s a lot of jalopies on the road, and a lot of pent-up demand for new cars.
Looking at Ford, we have a stock that yields a nice 4.6%. It’s also one that has been aggressively been raising its dividend of late, which is something I like to see.
Dividend Stocks to Buy for Q2: STAG Industrial Inc (STAG)
Dividend Yield: 7.1%
Small-cap REITs got absolutely crushed last year. Investors seems to be in a state of panic over the Fed’s plans to raise interest rates. After all, REITs are far more sensitive to financing costs than most stocks given the massive sum of money they often borrow to finance new property acquisitions.
One small-cap REIT that got hit particularly hard was STAG Industrial (STAG). From peak to trough, it dropped about 45% … and on no real news. STAG actually had a decent year in 2015 and even raised its dividend by a respectable 5%. At current prices, STAG now yields a juicy 7.1%.
STAG is an ideal holding for someone in or near retirement. Its properties are conservative light industrial and logistical buildings, and its tenant base is strong and diversified. It pays a high current yield, and delivers that payout monthly rather than the customary quarterly. And over the past three years, it’s grown its dividend at a 9% clip.
Dividend Stocks to Buy for Q2: Energy Transfer Equity LP (ETE)
Dividend Yield: 17.2%
If you want to step up the risk a notch, I recommend buying shares of Energy Transfer Equity (ETE). ETE was my pick in InvestorPlace’s Best Stocks for 2016 contest, and I’m not off to the best start. I’m down about 50% for the year as I’m writing this.
The still-unresolved merger with fellow midstream pipeline operator Williams Companies Inc (WMB) has weighed on the stock. The market hates nothing more than uncertainty, and with the merger seemingly in limbo, ETE has uncertainty in spades.
But if you’re willing to accept a little short-term volatility, I believe that ETE could be one of the most exciting dividend plays you’ll ever find. ETE sits at the top of a sprawling energy empire that includes control of and distribution rights in Energy Transfer Partners (ETP), Sunoco (SUN) and Sunoco Logistical Partners (SXL). For years, this has meant aggressive distribution growth often topping 30% per year.
Well, those days are over for the time being. I don’t see ETE raising its distribution by a single penny until the Williams merger issue is resolved. But even so, ETE yields a mild-blowing 17% at current prices. Even if the distribution gets cut in half or more, ETE is one of the fattest yielders you’re likely to ever find.
Dividend Stocks to Buy for Q2: Realty Income Corp (O)
Dividend Yield: 3.9%
My last stock — rock-solid REIT Realty Income (O) — may seem like an odd choice given that I recently reduced my holdings. Realty Income’s dividend yield is a little lower than I would normally like to see at 3.9%. But if you are looking for a dependable dividend stock with “bond-like” cash flows, Realty Income is still very much a decent choice.
Unlike most stocks, which generally pay their dividends quarterly, Realty Income pays monthly, which makes it a good stock for retirees needing income. And if you’re buying this stock with the intention of milking the dividend for the rest of your life, then buying at today’s prices and yields is perfectly reasonable. You’re still getting a better deal than you would in most corners of the bond market, and the dividend has grown at a reasonable 5% clip over the past ten years.
And incidentally, while I did sell the shares I held in my dividend growth portfolio as part of a tactical trade, this is a stock I very much expect to return to time and time again in the years to come.
As of this writing, Charles Sizemore was long MSFT, PSEC, KMI, EPD, ETE, RNP, GM, F, STAG and O stock.