I often think of this time as "The Era of the Income-Challenged Investor."
And with good reason.
U.S. Federal Reserve policymakers just voted to keep benchmark short-term interest rates down near zero - and said they're likely to stay there through 2022. Everyone knows the Fed has held rates so low for so long that there are no decent-yielding fixed-income investments - unless you're willing to "pay up" for riskier junk bonds.
That "income-itus" has spread to the stock market, too.
Thanks to the COVID-19 pandemic, 40 S&P 500 companies suspended dividends, and another 18 cut them completely in the first five months of the year - with the worst of it coming during what Barron's nicknamed the "May Dividend Massacre."
But that doesn't mean there aren't great dividend plays available.
They're there - for the taking. Lots of companies pay fat dividends to their stockholders, earn plenty of money regularly to keep paying them, and offer a wealth-building "kicker" called appreciation.
Today, I'm going to tell you about three of my favorites. These are great plays if you're looking to add a nice income stream to your investments. They're even better if you're thinking about retirement - or are already there.
The Secrets of Successful Dividend Searches
I'm going to let you in on a personal secret of mine. When searching for dividend plays in the stock market, the single most important thing I consider is the underlying company's ability to generate steady revenue and profits.
And when I say "steady," I'm talking every single quarter - for years, or even decades.
Profitability comes down to what's left after expenses, debt service, taxes, and depreciation. For me, what's important comes down to "net income available to common shareholders."
From that pool of money comes the dividend.
The next most important thing for me is something called the "dividend-payout ratio." That's the fraction, or ratio, of net income available to common stockholders that goes to pay the dividend.
If you're looking at a dividend-payout ratio of 70%, you're talking about a company whose dividend eats up seven-tenths of the net income available to common stockholders. The remaining net income can be used for investment or growing the business.
While some companies pay a hefty dividend, they may have to use most - and sometimes all - of their net income to pay shareholders. Sometimes companies have to borrow money to pay their dividends.
Let me be clear: I want no part of that game. It means the company's not one of those capable of delivering the "steady" profits I referred to just a moment ago. In other words, the company isn't profitable enough; something's got to give.
And that "something" is probably the dividend.
The three companies I'm showing you here are all giants - each of them very profitable and each with payout ratios less than 85%, which is my limit.
Some companies, including real estate investment trusts (REITs), have payout ratios north of 85%. And that makes sense for them, because that's how they're structured - to pay out nearly all of their net income.
However, most companies aren't structured that way - which is why an 85% payout ratio is the highest that I'm comfortable with. That's because I want the company to have a good cushion for periods of uncertainty - and money to reinvest to grow the business.
[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"] Before we get into the specific picks here, let me make one last important point.
These are super-high-yielders in the near term.
But that's not the "end of the story."
The three companies here all have good "capital-appreciation potential," too. That means their stock price can rise. That's a fantastic kicker. I love getting paid by a company to sit and watch its share price surge.
In short, over the long haul, you're going to pull down one heck of a "total return" (capital gains plus dividends) on these three stocks.
And here they are:
Shah's Favorite Dividend Play, No. 1: Verizon Communications Inc. (NYSE: VZ) - You all know Verizon; it offers communications, information, and entertainment products and services to consumers, businesses, and governments worldwide. It also owns Yahoo Finance - one of the most popular investment-information sites on the Internet.
With its stock price at $55.66, Verizon's dividend yield is a very handsome 4.38%.
The company generates tons of cash and is very profitable. Its payout ratio is an extremely healthy 55.25%.
In my book, that makes it a winner.
Not only does VZ pay you quarterly, but the stock is in my opinion a good value here and capable of appreciating for years into the future.
On a relative value basis, the stock trades at a price/earnings (P/E) multiple of only 12.80. That's about half of what the P/E ratio is for the whole market.
Shah's Favorite Dividend Plays, No. 2: AbbVie Inc. (NYSE: ABBV) - You may not know AbbVie's name, but you or a friend or family member probably know its products. AbbVie is a gigantic pharmaceutical company that discovers, develops, manufactures, and sells pharmaceuticals in the United States, Japan, Germany, Canada, France, Spain, Italy, the United Kingdom, Brazil, and pretty much the rest of the world.
With a share price at $97.27, ABBV's dividend yield is a sweet 4.88%. Being one of the world's premier Big Pharma companies, it has huge revenue, generates huge profits, and boasts net income available to common shareholders of more than $8 billion.
The dividend payout ratio on that pile of cash is an acceptable 77.75%.
With a yield of nearly 5%, it's an income stream that certainly works for me.
And being a leader in its industry, ABBV's stock, which is already making new highs, is headed higher. Value-wise, the stock trades at a P/E ratio of 17, which is also below the rest of the market.
Shah's Favorite Dividend Plays, No. 3: Wells Fargo & Co. (NYSE: WFC) is one of the biggest banks in the United States.
With its stock price at $27.35 - down by half from its 52-week high of $54.75 - Wells Fargo's dividend yield is a whopping 7.4%.
Despite the sky-high yield, the payout ratio is only 69.25%. That's a lot of yield coming out of a too-big-to-fail (TBTF) bank.
Wells' stock has been underperforming its peers and the market for years - and for very clear reasons.
Wells has had lots of issues and has been fined repeatedly for what I call criminal activity - ripping off its own customers by signing them up for services they didn't want and charging them fees they didn't know they were being charged. The big bank's had other issues, too. But hopefully all the bad news is out, and the company's new management is cleaning house.
As ugly as that sounds, let me "bottom line it" for you: Wells Fargo is still a TBTF financial institution that makes a hell of a lot of money.
It has a P/E ratio of 9.25, which is cheap considering how much the bank earns.
I especially like WFC as a long-term "Hold." I think it's going to double in the next few years and keep moving higher from there. And if Wells is going to yield 7.4% annually - based on what we're paying for the shares now - well, heck, I'm all in.
So, there you go. You can find yield out there; you just have to look in the right places.
And in the meantime, don't forget to check out my colleague Andrew Keene's latest presentation on how to make your portfolio "recession-proof"...
You see, while most investors watched their hard-earned money evaporate during the 2008 recession, Andrew collected thousands per week by developing the ultimate indicator.
Andrew used it to identify the moves all the big players were quietly making... putting him in the know weeks before others caught on. Today, he's spilling the beans so that you, too, can turn any market condition into profits! Click here now...
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.