Wednesday, August 18, 2010

Eight Dividend Stocks Yielding More than Fixed Income

Over the past two years, the yields on most investment grade fixed income securities have declined substantially. Investors who need to generate income in retirement are running out of options. For example back in 2006 and 2007 the yield on US 10 year Treasury note was almost 5%. Currently the yield on US 10 Year Treasury note is less than 3%. As a result many investors are focusing their attention to blue chip dividend stocks these days.

There are many solid Blue chip stocks which yield more than fixed income. In addition to that solid dividend stocks could also afford to increase the dividend payment, which offers protection against inflation. Thus, investors could either tie up their money for a prolonged period of time in bonds or they could purchase dividend stocks which provide a higher yield as well as the possibility of dividend growth to outrun inflation.

Finding the best dividend stocks does require some research however. Investors should evaluate whether the company researched has the ability to raise earnings for the foreseeable future. Investors should then make sure that they are not overpaying for the shares. The sustainability of the dividend payment is important as well, since a well covered dividend could withstand short-term earnings fluctuations much more easily than a not so well covered payment. In addition to that, by focusing on companies with a strong culture of paying higher dividends for at least ten consecutive years, investors would be increasing their chances of generating income in retirement that at least keeps up with inflation overtime.

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. The company has managed to deliver a 11.10% average annual increase in its EPS since 2000. Analysts expect a 9.80% increase in EPS to $4.83 in 2010, followed by an 8% increase to $5.23 in 2011. Yield: 3.60% (Analysis)

Chevron Corporation (CVX) operates as an integrated energy company worldwide. The company has managed to deliver a 3.10% average annual increase in its EPS since 2000. For fiscal year 2010 analysts expect earnings to increase by 53% to $8/share. Analysts also expect earnings per share to rise 25% from there to $10/share by FY 2011. Yield: 3.60% (analysis)

Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. It operates in four segments: Pharmaceutical Products, Diagnostic Products, Nutritional Products, and Vascular Products. The company has managed to increase earnings per share by 8.40% on average since the year 2000. For fiscal years 2010 and 2011, analysts expect EPS to increase from 3.69 in FY 2009 to $4.24 and $4.77. Yield: 3.40% (Analysis)

Kimberly-Clark Corporation (KMB), together with its subsidiaries, engages in the manufacture and marketing of various health care products worldwide. The company operates in four segments: Personal Care, Consumer Tissue, K-C Professional & Other, and Health Care. Yield: 4.00% (Analysis)

The Procter & Gamble Company (PG) engages in the manufacture and sale of consumer goods worldwide. The company operates in three global business units (GBUs): Beauty, Health and Well-Being, and Household Care. Earnings per share have grown at an average pace of 12.50% per annum. For FY 2010, analysts expect the company to earn $4.15/share, which is higher than 2009’s EPS of $3.58. For FY 2011 analysts expect Procter & Gamble to earn $4.10/share. Yield: 3.20% (Analysis)

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. It principally offers sparkling and still beverages. The company has managed to deliver a 14.30% average annual increase in its EPS over the past decade. Analysts are expecting a 17% increase in EPS to $3.45 for 2010 and $3.76 by 2011. Yield: 3.10% (Analysis)

Universal Corporation (UVV), together with its subsidiaries, operates as the leaf tobacco merchants and processors worldwide. It engages in selecting, procuring, buying, processing, packing, storing, supplying, shipping, and financing leaf tobacco for sale. Earnings per share have grown by 1.50% on average since 2000. Analysts expect UVV to earn $5.25/share in 2010 and $5.63/share in 2011. This is an increase over the $4.32/share Universal earned in 2009. Yield: 5% (Analysis)

Sysco Corporation (SYY), through its subsidiaries, markets and distributes a range of food and related products primarily to the foodservice industry in the United States. The company has managed to deliver an 11.20% average annual increase in its EPS since 2000 to 1.80/share. For the next two years analysts expect EPS to increase to $1.81 and $1.92 respectively. Yield: 3.20% (Analysis)

While dividend stocks would likely produce total returns that are higher than purchasing fixed income today, bonds still should have a place in a retirement portfolio. An allocation to US Treasuries would have protected one’s portfolio during the Great Depression or during the most recent financial crisis. Ensuring that your portfolio lasts a lifetime should be much more important than focusing on one asset class. Blue Chip dividend stocks would provide inflation adjusted stream of income over time, while even a modest 25% allocation to bonds purchased over time would provide payout stability in the event of a deflation or during an economic recession coupled with low inflation. In addition to that stocks are inherently riskier than government bonds, and as such there is a possibility of losing principal invested.

Full Disclosure: Long all stocks mentioned

This article was included in the Carnival of Personal Finance #272 – Yogi Berra Edition!

Relevant Articles:

- Inflation Proof your income in retirement with Dividend Stocks
- Living off dividends in retirement
- Fixed Income for dividend investors
- Dividends Stocks versus Fixed Income


  1. Love the blog and read every post.

    Can you talk about potential exit criteria?

    Certainly if a company cuts its dividend, its an auto sell. How about if it does not raise the annual div?

    Lastly, if the price appreciates to the point where your current yield < entry yield (say 1%), but your yield on cost is still very high (3+%), do you sell, deal with the capital gains tax and then invest in a company whose current yield is ~3+%?

  2. Hey DGI,

    nice post as always. I have been reading every post of your blog now for already a few months.

    Since I'm European and somehow missing similar stock analyses for European stocks I've started a blog dealing with early retirement in Europe. See

    As one of the pillars of my investing strategy are dividend growth stocks I also want to present European dividend growth stocks in my blog. The first one I discuss is Scottish Southern Energy (SSE).

    Keep on with your truely great blog.


  3. I just bought additional shares of JNJ as its yield is like that of ABT, highest yield in about 30 years due to the ever increasing dividend each year.

    If fixed income yields continue to drop, then good dividend producing stocks are going to be driven up to levels where the current yield is likely to become unattractive. At that point one will have to make the decision whether or not to take profits and live off the capital gains, due to the much higher risk of declines in the market values, but not a bad things if this comes to past for current holders. Don't think that will happen anytime real soon but one should be aware.

    I remember the huge decline in the utility stocks during the 70's that took huge chunks out of market value. Nothing is forever.

  4. Hi, Thank you very much for putting all the time into analysis that you do! I would like to try analyzing some stocks also. I can find share price and dividends from Yahoo but can you tell me where do you get your historical data on earnings?



  5. Anon,

    I only sell if htree thins happen:

    As a general rule I keep holding onto a stock that increases dividends and thus yield on cost even if it becomes over valued. I typically allocate dividends and new capital in the undervalued positions. Thus an overvalued position becomes a smaller portion of overall portfolio over time.
    I don't use hard and fast rules based off yield in selling. These look good on paper, but in reality they look hard to implement.


    Thanks, good luck in your early retirement in europe.


    I doubt dividend yields will decrease to 1%. If dividend income keeps increasing, and it meets or exceeds your expenses, why go through the hassle ot buying and selling? the more active you are the higher the chances of compounding mistakes.

    Last anon,

    I use company annual reports for historical information.


Questions or comments? You can reach out to me at my website address name at gmail dot com.

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