Three stocks with safe double-digit dividend yields
Well, okay, it’s impossible to say for sure which dividends are safe and which aren’t in this “take no prisoners” bear market. But one sure sign of an unsafe dividend is a double-digit yield. Or is it?
According to Investopedia, not all double-digit yields are created equal. After screening all the stocks in the S&P 500, they’ve come up with three stock picks they say have double-digit dividend yields that investors can rely on.
Here’s my quick take on the three dividend stocks mentioned (the stars represent Dividendinvestor.com’s star ranking system – three stars are five years of consecutive dividend increases, four stars are ten, and five stars are 20):
BB&T (BBT: 22.69 -3.69%, yld: 2.55%) (*****) – Trading at about $14, the shares of this regional mid-Atlantic bank sport a dividend yield of over 13.5%. BBT is a Dividend Aristocrat – it has raised its dividend payments for 37 consecutive years – and as far as I know it’s the only bank left standing in that elite group of dividend-raising companies. Whether or not its dividend will remain intact through the current crisis, only time will tell. In terms of valuation, compared with recent historical valuation ratios, the stock appears somewhat undervalued here. However, if the low-end estimates for ‘09 earnings prove correct, the stock’s fair value would be somewhere in the single digits. I’m currently short some puts in BBT, and could end up owning the shares at a net cost basis of a bit under $15. (I initiated the position with the full understanding – if not expectation – that the dividend could be cut at some point.)
CenturyTel (CTL: 36.00 -0.58%, yld: 7.94%) (*****) – The shares of this telecommunication services company are currently trading at about $24 with a dividend yield of over 11.5%. While the company’s payout ratio appears to be on the high side, its free cash flow would appear to be able to continue to support the dividend. Note, however, that CenturyTel is one of the companies with potential balance sheet issues appearing on AB Analytical Services’ list of “Dividends on Death Row.” Some valuation and price measures indicate the stock may be somewhat undervalued, while a comparison with recent historical valuation ratios suggests it could be slightly overvalued. I like to see all of these in agreement and would be inclined to wait for lower prices – perhaps below $20 – before initiating a position.
Reynolds American (RAI: 57.52 +0.14%, yld: 6.18%) (0 Stars) – The shares of this tobacco products maker are currently trading at about $32 with a dividend yield of over 10.5%. The dividend appears safe – at least it’s probably the safest of the three stocks mentioned in this post – but potential litigation and/or regulation issues affecting companies in this sector is always a risk. As with CTL above, the stock appears somewhat undervalued by some valuation and price measures but somewhat overvalued in comparison to recent historical valuation ratios. I currently own some RAI that was purchased around the middle of last year in my IRA as a defensive stock. Unfortunately it hasn’t proven very defensive. I might add slightly to the position if the stock drops to the mid $20s.
Related posts:
The highest dividend yields of the Dow
12 solid companies that pay a dividend
BusinessWeek: The U.S. companies with the safest dividends
SmartMoney’s 5%+ dividend stocks you can believe in
Dividends: The most and least secure for 2009
