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3 Compelling High Dividend Stocks To Consider For Passive Income By Eli Inkrot of Sure Dividend.
Stocks that offer the combination of a high dividend yield, plus a robust business model with steady earnings growth, is a unique find. Often, a high dividend yield is associated with greater risk, but that doesn’t necessarily have to be the case.
Many factors lead to a high dividend yield, including a security’s payout ratio and valuation. However, a willingness to pay out a more significant portion of profits in the form of cash dividends can be appealing for investors, especially if it is backed up by a solid underlying business model with durable competitive advantages.
With that idea in mind, these three high dividend stocks pay attractive yields above 5%, have strong business models with steady profits, and have the ability to raise their dividends over time.
High Dividend Stock #1: AT&T (T)
AT&T is a telecommunications giant, offering a wide variety of services such as wireless, cable T.V., Internet, and satellite T.V. under the DirecTV brand. The company provides communications services to 100 million U.S. customers and another 3 million businesses. It also has the WarnerMedia segment, including content brands such as Turner, HBO, and Warner Bros.
AT&T has increased its dividend for 36 consecutive years. Moreover, given a payout ratio above 50% and a valuation under ten times earnings, this means that the starting dividend yield is often substantial. Indeed, that is certainly the case today. AT&T presently pays out a quarterly dividend of $0.52 per share or $2.08 on an annual basis. This equates to a starting yield of 7.2%.
The company is estimated to earn $3.25 per share for 2020. Based on the current share price, this implies a price-to-earnings (P/E) ratio of just 8.9. AT&T’s average P/E ratio over the past decade has been between 12- and 13-times earnings.
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If earnings were to grow by 3% annually, investors could expect $3.77 in earnings-per-share after five years. Using 11 times earnings as a baseline would imply a future share price of just over $41. Furthermore, investors could anticipate collecting $11 in dividend payments as well. Collectively, that’s a ~$52 total return expectation. Compared to the current share price, this represents the potential for 12.7% annualized gains. This is a solid potential rate of return for one of our high dividend stocks.
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High Dividend Stock #2: PPL Corporation (PPL)
PPL is a utility that distributes power to more than 10 million people in the U.S. and the U.K. It is the parent company of seven regulated utility companies and provides electricity to customers in the U.K., Pennsylvania, Kentucky, Virginia, and Tennessee. PPL also delivers natural gas to customers in Kentucky. PPL is one of the largest regulated utility companies in the U.S. and employs more than 12,000 people.
In August 2020, the company announced that it was beginning to sell its U.K. business to focus on the U.S. market. The company has seen a mild deterioration in its fundamentals over the course of 2020. However, its core metrics have remained relatively stable thanks to the steady nature of the utility business model. PPL announced third-quarter earnings results on 11/5/2020. Revenue declined 2% for the quarter, compared with the same quarter last year. Adjusted EPS fell 5% year-over-year. These declines were manageable and have not jeopardized the company’s dividend payout.
In the future, we expect modest EPS growth of 2% per year for PPL. Utilities are not traditionally high-growth businesses; that said, the company should see modest EPS growth through customer additions and periodic rate increases.
Much like AT&T, PPL has a storied dividend record, having increased its payout for 20 consecutive years. While the rate of increases has not been spectacular – coming in at an average compound rate of 1.7% per year – the consistency is noteworthy. The current share price near $27.90, and the $0.415 quarterly dividend PPL presently has a high dividend yield of 5.9%.
With a projected dividend payout ratio below 70% for 2020, the dividend appears secure. And since the utility business model generates steady earnings, even during recessions, PPL should maintain its dividend even in a severe recession.
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High Dividend Stock #3: Altria Group (MO)
Altria Group traces its roots back to 1847, as the parent company of Philip Morris USA. It is a consumer staples giant, selling the Marlboro cigarette brand in the U.S. and several other non-smokable brands, including Skoal, Copenhagen, and the Ste. Michelle’s brand of wine. Altria also has a 10% ownership stake in global beer giant Anheuser Busch Inbev (BUD) and large stakes in Juul, the manufacturer, and distributor of a vaping product, and cannabis company Cronos Group (CRON). The $78 billion market capitalization company generated $25 billion in sales last year.
Altria’s M.O. has been its exceptional dividend record, having increased its payment for 51 consecutive years. This makes Altria a member of the exclusive list of Dividend Kings. Furthermore, the rate of increases has been impressive – coming in at an 8.9% annualized rate dating back to 2010.
The current dividend of $0.86 per quarter amounts to $3.44 on an annualized basis. Compared to the current share price near $41.90, this works out to an 8.2% starting dividend yield.
Altria is expected to earn just over $4.30 this year, working out to a P/E ratio of 9.7. This is much lower than its average of 16 times earnings during the last decade.
If earnings were to grow by 3% annually, you would anticipate the company earning $5.00 after five years. Using a multiple of 11 – much lower than the historical average –equates to the potential for a future share price near $55. In addition, you would anticipate collecting ~$18.80 in cash dividends as well, equating to a total value of ~$73.80. That works out to the potential for 12.0% annualized gains.
Final Thoughts
It’s rare to find securities with both a high yield and a high-quality profit engine backing the dividend payments. However, that is not to say that it is impossible. For example, AT&T, PPL, and Altria share both of these characteristics with 5.9% to 8.2% dividend yields, reasonable valuations, and strong underlying businesses. As a result, these three high dividend stocks appeal to investors searching for high yields and safe payouts.
If you would like a copy of the template I use to perform fundamental analysis then feel free to grab your copy below. I explain how I use the template here!
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Thank you to Ben and Eli for the article. I have been following Sure Dividend for a while, and If you are a DIY investor and Dividend Growth Investing is your passion, I would highly recommend that you check out The Morning Dividend Newsletter. They deliver the latest news to your inbox every morning for free!
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When saw the headline was 90% sure that T and MO will be at the list 😀 Looks like I wad right. Companies with substantial share at my portfolio. Delivering me 20$/quartet 🙂 Love them both.
It could not be a high yield list without those two 🙂 Not without their challenges but two companies with a very rich history indeed
I would appreciate if you can share your thoughts on BAT, and in particular why do you chose MO ver BAT? Somehow I see everywhere mostly MO, and I am wandering if it comes from the popularity of US stocks? Somehow, I would expect more favorable approach towards European stocks here 😉
Two things, this was a guest post from sure dividend so not my thoughts 😉
Second I own both. I actually prefer BAT more due to there presence in emerging markets but this is a declining industry so they are both T4 stocks for me 👍