Everyone knows the Fed’s manipulated interest rates down so low for so long there are no decent yielding investments in the fixed income market unless you’re willing to pay up for junk bonds.
But that doesn’t mean there aren’t great yielding investments readily available in other markets.
I’m talking about the stock market. Lots of companies pay dividends to their stockholders.
Some of them pay fat dividends, earn plenty of money regularly to keep paying them, and offer a kicker called appreciation.
The most important criteria I look for when I’m searching for yield in the stock market is a company’s ability to generate steady revenue and profits. By “steady” I mean every quarter, for years, and 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.”
Out of that 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 a company has a payout ratio of 70% it means the dividend eats up 70% 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, sometimes all, of their net income to pay shareholders. Sometimes companies must borrow money to pay their dividends. I want no part of that game because it means the company’s not profitable enough and eventually something’s going to give, probably the dividend.
The three companies here are all giants, all of them are very profitable and all of them have payout ratios less than 85%, which is my limit.
Some companies, including REITS, have payout ratios north of 85% and that makes sense for them because that’s how they’re structured, to payout most of their net income. However, most companies aren’t structured that way, which is why an 85% payout ratio is the most I’m comfortable with. That’s because I want the company to have a good cushion and money to spend to grow the business.
The three companies here all have good appreciation potential too. That means their stock price can rise. That’s a fantastic kicker. I love getting paid by a company to watch their stock appreciate.
First up is Verizon Communications Inc. (VZ). You know Verizon, it offers communications, information, and entertainment products and services to consumers, businesses, and governments worldwide.
With its stock price at $56.90, Verizon’s dividend yield is a very handsome 4.32%.
The company generates tons of cash and is very profitable. Its payout ratio is an extremely healthy 55.25%. That’s a winner in my book.
Not only does VZ pay you quarterly, 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 multiple of only 12.80. That’s about half of what the PE ratio is for the whole market.
Second up is AbbVie Inc. (ABBV). You’ve probably heard of AbbVie, it’s a giant 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 its stock price at $96.20, ABBV’s dividend yield is a sweet 4.90%. Being one of the world’s largest pharma companies it has huge revenue, generates huge profits, and its net income available to common holders is more than $8 billion.
The dividend payout ratio out of that pile of cash is 77.75%.
At almost 5% yield, 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 PE ratio of 17, that’s also below the rest of the market.
Last but not least is Wells Fargo & Company, one of the biggest banks in the United States.
With its stock price at $27.55, Wells’ dividend yield is a whopping 7.4%.
As high as that is, the payout ratio is only 69.25%. That’s a lot of yield coming out of a too-big-to-fail bank.
Wells’ stock has been underperforming its peers and the market for years, for good reasons.
Wells has had lots of issues and been fined repeatedly for what I call criminal activity, meaning 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 a lot of what’s happened at the bank is, it is still too-big-to-fail and makes a lot of money.
The stock trades at a PE 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 going higher from there. And if Wells is going to yield 7.4% annually, I’m all in.
So, there you go. You can find yield out there; you just have to look in the right places.
Of course, there are always other options to make extra cash.
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