High-yielding stocks are back in vogue this year as investors hunt for dividends in a low-rate environment and favor value-oriented strategies. Even after a rally in many of the stocks, there still plenty of ways to get high dividends.
Barron’s screened the S&P 500 based on data from S&P Dow Jones Indices for top-yielding stocks and came up with eight companies with dividends in the range of 5% to 7%. They include Altria (ticker: MO), AT&T (T), Exxon Mobil (XOM), Chevron (CVX), and Valero Energy (VLO).
Wolfe Research strategist Chris Senyek recently noted that high-yielding stocks were historically inexpensive versus the S&P 500 based on price earnings ratios. Many have dividends that comfortably exceed their bond yields, he added.
Altria, whose shares trade around $46, is the top-yielding stock in the S&P 500. It has a dividend rate of 7.5% and trades for just 10 times projected 2021 earnings, about half the price/earnings multiple of leading consumer stocks and the overall market. The dividend is well covered by earnings.
Altria is favored by RBC Capital Markets analyst Nik Modi, who has a $56 price target. His view is that the maker of Marlboro cigarettes retains pricing power and that a proposed ban on menthol could be tied up in the courts for years.
Even if such a ban were put into effect, Altria is less exposed to menthol than other U.S. cigarette makers, and many menthol smokers would likely switch to regular cigarettes, Modi has argued.
AT&T, at around $28.50, is the No. 2 yielder in the S&P 500 at 7.2%. That high dividend is due to be cut after the company merges its WarnerMedia business with Discovery (DISCA) in a transaction scheduled to close in about a year. The new dividend is expected to result in a yield of just over 5% after a potential spinoff to AT&T holders of a 71% stake in the new Warner Bros. Discovery.
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Barron’s has written favorably on AT&T, arguing that the company should have more financial flexibility to invest in its core wireless business and pay down debt after the Discovery deal.
The Big Oils are back in favor this year after a surge in crude prices to over $70 a barrel and continued industry restraint on capital spending. Chevron’s dividend looked solid at lower oil prices. Exxon’s is increasingly secure now and might increase it later this year, analysts say. Exxon, at a recent $61.40, yields 5.7% and Chevron, at about $105, yields 5.1%.
Analysts are favoring Exxon. Morgan Stanley’s Devin McDermott recently wrote that the company’s dividend coverage was at its best level in a decade and that second-quarter cash flow looked strong thanks in part to strong chemical earnings. Exxon is McDermott’s top pick among its peers. He is also bullish on Chevron.
Pipeline operators like Williams Co. (WMB) and Kinder Morgan (KMI) are benefiting from higher commodity prices and limited capital spending. That is boosting free cash flow and enhancing dividend coverage. Kinder Morgan, at around $18, yields 6%, and Williams, at a recent $26.50, yields 6.1%.
Kinder Morgan is projecting about $2 billion of excess cash flow in 2021 after paying its dividend, which was lifted 3% earlier this year. Williams, which operates the critical Transco natural-gas pipeline linking the Gulf Coast with the Northeast, covers its dividend from cash flow by a ratio of about two to one. Both Kinder Morgan and Williams are corporations, which means no cumbersome K-1 tax forms—unlike pipeline operators structured as partnerships.
Valero Energy, one of the country’s top independent refiners, is benefiting from widening margins and increased demand for gasoline and other crude products as the economy reopens. The company is expected to start covering its dividend in the current quarter. The stock, at around $78, yields 5%. Lumen Technologies (LUMN), which operates a global fiber network, is expected to comfortably cover its $1 a share dividend from free cash flow in 2021. The company argues that its fiber assets are undervalued relative to those of peers. Its shares, at around $14, yield 7%.
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