According to Benjamin Graham’s margin of safety principal – a measure of relative value between stocks and bonds – buying an S&P 500 index fund poses less risk than purchasing long-term U.S. debt.
However, the dividend yield of the S&P 500 – at 2.09 per cent – is scraping against all-time lows.
This puts income investors in a bind: Bonds with a strong credit rating don’t yield much, exposing investors to a substantial amount of interest-rate risk on the 10- and 30-year end of the curve.
Stocks – when purchased through an index fund – offer an earnings yield far in excess of U.S. Treasury bonds, but don’t offer much in terms of absolute yield. That’s acceptable for those seeking long-term appreciation, but troublesome for those in need of income.
One strategy that income-focused investors should consider is allocating their portfolios toward a blend of U.S. fixed income and carefully chosen dividend stocks.
Even though U.S. bond yields are low, if the country becomes tangled in a Japan-like quagmire, already-low yields could drop further. This scenario could offer capital appreciation opportunities and (at least some) recession protection.
Regarding stocks, there are several high-yield opportunities that – with diversification – offer reasonable opportunities for income, capital appreciation and safety.
The 10 stocks on the following pages have been screened for the following criteria:
*Each stock yields more than a 30-year Treasury bond.
*TheStreet Ratings recommends each stock as a “buy.”
As always, stock ratings should not be treated as gospel – rather, use them as a starting point for your own research.
The stocks on the following pages are ranked by their dividend yield, in ascending order.
10. Illinois Tool Works is a manufacturer of industrial products and equipment.
Dividend Yield: 3.40 per cent
Rated “B (buy)” by TheStreet Ratings: Illinois Tool Works’ gross profit margin for the second quarter of fiscal 2011 was essentially unchanged from a year earlier. The company has grown sales and net income during the past quarter when compared with the same quarter a year ago, however, it was unable to keep up with the growth of the average competitor within its industry.
Illinois Tool Works has average liquidity. Currently, the Quick Ratio is 1.08 which shows that technically this company has the ability to cover short-term cash needs. The company’s liquidity has decreased from the same period last year, indicating deteriorating cash flow.
During the same period, stockholders’ equity (“net worth”) has increased by 19.33 per cent from the same quarter last year. Together, the key liquidity measurements indicate that it is relatively unlikely that the company will face financial difficulties in the near future.
9. Genuine Parts Company Genuine Parts Co. is a car-parts distributor.
Dividend Yield: 3.43 per cent
Rated “A- (buy)” by TheStreet Ratings: Genuine Parts’ P/E ratio indicates a discount compared to an average of 17.26 for the distributors industry and a value on par with the S&P 500 average of 14.59.
For additional comparison, its price-to-book ratio of 2.87 indicates a premium versus the S&P 500 average of 1.96 and a premium versus the industry average of 2.72.
The current price-to-sales ratio is well below the S&P 500 average and is also below the industry average, indicating a discount. The valuation analysis reveals that, Genuine Parts seems to be trading at a discount to investment alternatives within the industry.
8. Mattel is an iconic toymaker.
Dividend Yield: 3.51 per cent
Rated “A- (buy)” by TheStreet Ratings: Mattel’s gross profit margin for the second quarter of fiscal 2011 was essentially unchanged from a year earlier. The company has grown its sales and net income during the past quarter. Although growth in net income has outpaced the industry average, its revenue growth has not.
Mattel has strong liquidity. Currently, the Quick Ratio is 1.59 which shows the ability to cover short-term cash needs. The company’s liquidity has increased from the same period last year.
During the same period, stockholders’ equity (“net worth”) has remained virtually unchanged only decreasing by 1.59 per cent from the same quarter last year. The key liquidity measurements indicate that the company is unlikely to face financial difficulties in the near future.
7. Johnson & Johnson is a consumer and health-care company.
Dividend Yield: 3.59 per cent
Rated “B (buy)” by TheStreet Ratings: Johnson & Johnson’s gross profit margin for the second quarter of its fiscal year 2011 was flat. Even though sales increased, net income decreased.
Johnson & Johnson has strong liquidity. Currently, the Quick Ratio is 1.94 which shows the ability to cover short-term cash needs. The company managed to increase its liquidity from the same period a year ago, despite already having strong liquidity to begin with. This would indicate improved cash flow.
During the same period, stockholders’ equity (“net worth”) has increased by 17.6 per cent from the same quarter last year. The key liquidity measurements indicate that the company is unlikely to face financial difficulties in the near future.Report Typo/Error
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- Illinois Tool Works Inc$113.06-0.22(-0.19%)
- Genuine Parts Co$90.59+1.08(+1.21%)
- Mattel Inc$32.75+0.29(+0.89%)
- Johnson & Johnson$113.44-1.43(-1.24%)
- Eaton Corporation PLC$63.71-0.09(-0.14%)
- E I du Pont de Nemours and Co$69.70+0.24(+0.35%)
- Sysco Corp$47.49-0.10(-0.21%)
- Consolidated Edison Inc$73.17-0.45(-0.61%)
- Cinemark Holdings Inc$39.96-0.01(-0.03%)
- Pfizer Inc$32.18-0.36(-1.11%)
- Updated October 21 4:00 PM EDT. Delayed by at least 15 minutes.