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This performance falls well short of investors’ hopes and expectations coming into the new year. So, now that we are closing in on the halfway point, the stutter-start for the market that has characterized the past several months is beginning to give way to the notion that a very good second half of the year is shaping up. Investors should expect back-end-loaded returns for risk-on assets, and that forecast is just now taking hold, with vast numbers of fund managers on the wrong side of the investing landscape by holding too much cash, too much long bond exposure and too many short positions via indices or individual stocks.
End-of-the-quarter window-dressing began in earnest this month, as the wrong-way portfolio managers were provoked into making drastic changes in their asset mix, jettisoning long-dated fixed income, covering shorts and putting those assets (plus uninvested cash) to work in rapid fashion. No professional wants to put out a report card in early July that reveals bad bets and being underweighted in sectors that are leading the market to new highs. For this reason, window-dressing by itself should keep a firm bid under stocks and might well take the S&P up to the extreme high end of the long-term channel uptrend of 2000 by month-end.
With this backdrop of fresh technical highs, professional money realigning to risk-on assets, a low level of investor enthusiasm, rising economic conditions for global markets, persistently low interest rates, strengthening corporate balance sheets, diminished geopolitical risk, highly accommodative central bank policies and history’s greatest number of people entering retirement, the investment case for strategic high-yield assets is very strong for the balance of 2014.
In order to take advantage of this inflow of capital into assets with yield, look no further than the 10 highest-yielding stocks in the Dow Jones Industrial Average. These blue-chip names pay out sizable yields ranging from 3% to 5.2%, and all of them stand to benefit from the market's appetite for income.
Now that we have an idea of what the market will favor during the second half of 2014, let's take a look at the top 10 Dow dividend stocks by yield for June. (Note: All yields and returns are as of 6/26.)
Top Dividend Stock #10: Intel (INTC)
Dividend Yield: 2.92% YTD Performance: 18.59% 52-Week Return: 27.22% The recent price appreciation in shares of Intel (INTC) has pushed its dividend yield down from 3.34% last month to just 2.92% at current levels, and the stock has fallen four spots on our list for June.
After a weak start to the year, INTC has rallied nearly 15% over just the past month. Almost half of that gain came on June 13, after the company announced that it had raised its guidance for revenue and gross profit margin for the quarter and the remainder of the year.
The shares climbed roughly 7% that day and continued upward to make a new 52-week high of $31 on Thursday. Intel cited its expectation for "strong demand for business PCs" as the reason for raising their outlook.
Intel is now expecting to grow revenue to up to $14 billion this year, which is much higher than the previously forecast $12.5 billion to $13.5 billion range. Even after the recent run-up, INTC shares still trade at a reasonable valuation of 16.6 times earnings and, with the 90-cent annual payout, there could be more upside potential in 2014 for both dividend and growth investors.
Top Dividend Stock #9: Merck (MRK)
After a pullback in early May, Merck (MRK) is now challenging its 52-week high at $59.84, trading within just 52 cents of that level last Friday. The trade-off, though, is that the stock's yield is now flirting with the 3% mark.
Merck recently announced its intention to buy Idenix Pharmaceuticals (IDIX) in a deal worth approximately $4 billion. MRK hopes the buyout will allow them to enter the hepatitis C market, where rival Gilead Sciences (GILD) currently dominates with its popular treatment, Sovaldi.
The stock was up on the news, but the valuation is stretched at these levels. At 38.2 times earnings, MRK trades at nearly double the industry average of 19. Still, investors have been rewarding the shares lately, knowing that they have a $1.76 annual payout to look forward to despite its nearly overbought condition.
Top Dividend Stock #8: Cisco (CSCO)
Dividend Yield: 3.10% YTD Performance: 9.90% 52-Week Return: 0.69% Cisco Systems (CSCO) carries several traits that make it an attractive holding at this time. First, the stock is up over 10% year to date, which beats many of the other dividend-paying stocks on our list. It first popped higher when the company announced a dividend increase from $0.17 per share to $0.19 per share, and the yield now sits just above 3%.
Second, the shares are highly undervalued compared to the industry average of almost 41. CSCO has a P/E ratio less than half of that at 16.65 versus peers like VMware (VMW) and Juniper Networks (JNPR), which carry P/E ratios of 40.71 and 26.7, respectively.
Finally, analysts are forecasting that earnings growth will begin to move higher over the coming years, with a long-term projected growth rate of 9.1% per year. Despite the fact that it has outperformed the major indices in 2014, Cisco's dividend yield remains comfortably above 3%. Additionally, a low payout ratio of about 41% gives management the option of raising that dividend in the future.
Top Dividend Stock #7: McDonald's (MCD)
Dividend Yield: 3.19% YTD Performance: 4.62% 52-Week Return: 4.40% McDonald's (MCD) is the biggest restaurant chain in the world, with over 35,000 stores around the globe that serve almost 70 million people per day, and it has one of the most recognizable logos on Earth — the golden arches. The stock has actually performed fairly well in recent months, rising approximately 8.5% since it bottomed out back in February.
A good deal of that upside move came as investors started to pile into dividend-paying blue-chips earlier this year. With a current annual payout of $3.24 per share, the stock yields 3.19% at current prices, and the payout ratio of 56.3% suggest there is room for dividend increases down the road.
When the company reported revenue of $6.7 billion and EPS of $1.21 last quarter, investors pushed the stock over the $100 level, and the shares now sit about two bucks below their 52-week high of $103.78. Even at these elevated levels, MCD makes for a much better value investment than some of its peers.
For instance, MCD has a P/E ratio of just 18.4 compared to competitor Burger King's (BKW) 37.6 multiple and Wendy's (WEN) 37.7 multiple. These metrics, along with the MCD's stable and dependable dividend, make for a great income-generating play on a reliable name.
Top Dividend Stock #6: Procter & Gamble (PG)
Dividend Yield: 3.27% YTD Performance: -3.43% 52-Week Return: 1.54% Procter & Gamble (PG) is one of only a handful of companies that can call itself a Dividend Aristocrat — companies that have steadily increased their dividend payouts for 25 consecutive years. PG has actually gone above and beyond that requirement, having raised its dividend every year for a whopping 58 consecutive years.
The stock got a nice boost after its last increase, which brought the dividend up from 60.15 cents to 64.36 cents per share. The shares pushed up to six-month highs at the $83 level upon the announcement, but they have since come back down and now trade just under $79.
The increased payout and the recent setback in the share price have bumped PG up two places on our list for the second month in a row, and the new payout now accounts for a very decent yield of 3.2%. Also, in its latest earnings report, the company announced earnings per share of $1.04, which was 5% higher than a year earlier. That puts its P/E ratio at 21.4, which isn't great, but it's slightly lower than the industry average.
Top Dividend Stock #5: Chevron (CVX)
Dividend Yield: 3.29% YTD Performance: 4.81% 52-Week Return: 10.08% Chevron (CVX) continued to push up to new highs last week along with the rest of the market, trading to a 52-week high of $133.57 on Monday. The move comes amid accelerated turmoil in the Middle East that pushed the price of WTI crude up to just under $108 per barrel recently.
However, out of all of the U.S. oil companies with segments in the area, CVX is the most insulated from the consequences of the insurgency, as it operates entirely in the Kurdish-controlled area of the country.
CVX has a number of other things going for it as well. Those include a P/E ratio of 12.66 that's slightly below average for the group, a long-term growth forecast of almost 7% and a very nice 3.29% dividend yield, all of which surpass the corresponding numbers for rival Exxon (XOM).
Top Dividend Stock #4: General Electric (GE)
Dividend Yield: 3.35% YTD Performance: -6.21% 52-Week Return: 12.54% General Electric (GE) is a diversified technology, industrial and financial services conglomerate that makes everything from light bulbs to jet engines. After a rough start to the year, the stock has been rebounding since the beginning of February, and it is up about 7% from that point. However, GE's future prospects may be even brighter.
Adding further potential upside value to the stock, the EPA recently proposed new regulations that will require power plants to cut carbon dioxide emissions by 30% by the year 2030. The rules will force some plants that use energy-producing turbines that currently run on coal to switch to natural gas, which could greatly expand the customer base for GE's state-of-the-art gas turbines.
In addition to innovation, GE also excels at returning value to its shareholders. After cutting its dividend in the wake of the 2008-2009 financial crisis, the company has raised its payout for each of the last four years.
Most recently, GE announced a payout for the third quarter of $0.22 to be paid on July 25. The distribution makes for a 3.35% yield at current levels, and investors who count on dividends for income can look forward to increased payouts in the future, as GE sports a payout ratio of just 52.4%.
Top Dividend Stock #3: Pfizer (PFE)
Dividend Yield: 3.52% YTD Performance: -3.40% 52-Week Return: 3.97% Pfizer (PFE), the worldwide biopharmaceutical company, failed to secure a deal to buy out AstraZeneca PLC (AZN) last month, offering three different bids before giving up hope of acquiring the London-based biopharmaceutical company. Despite that disappointing news, PFE remains at No. 3 on our list again this month, and it carries one of the lowest payout ratios in the Dow at just 46.2%.
The low payout ratio means that the company will be able to increase its dividend payments in the future without the risk of incurring debt or having to pull from its cash reserves. Additionally, it gives investors something to look forward to. If PFE announces an increased payout, shares could soar on the news.
PFE reported solid first-quarter earnings results, as the EPS reading of $0.57 per share beat analyst estimates of $0.55 per share by 3.6%, as well as revenue that came in at $11.4 billion. At current levels, PFE trades pretty much in line with its peers, with a P/E ratio of 18 vs. the 19 industry average. That reasonable valuation, together with its 3.5% dividend yield, easily sets it apart from the pack and makes PFE a solid long-term dividend investment.
Top Dividend Stock #2: Verizon (VZ)
Dividend Yield: 4.33% YTD Performance: -0.36% 52-Week Return: -0.16% Verizon (VZ) has been essentially flat in 2014. But it got a bit of a boost when Warren Buffett announced that he had purchased approximately $500 million worth of VZ shares during the first quarter.
Several other billionaire hedge fund managers, including John Paulson of Paulson & Co. and Dan Loeb of Third Point Management, also added VZ to their stable of holdings recently. Part of the reason for all of the attention VZ has been receiving lately has to do with its ability to grow earnings per share in the first quarter.
According to a press release, "Verizon reported $1.15 in EPS in first-quarter 2014, compared with 68 cents per share in first-quarter 2013." That accounts for an increase of just under 70%. The biggest contributors to that growth were its wireless and TV segments, and the company brought in total revenue of $20.9 billion during the quarter.
VZ will release its next quarterly report in mid-July, and many dividend investors will be anxious to see if it can continue to grow at this accelerated pace. It is also likely that VZ will announce an increase in its dividend in the near future — it tends to do so once a year — as it is coming up on its fourth $0.53 quarterly payout. The next ex-div date will fall on July 8, so you can start collecting that 4.3% yield in no time at all.
Top Dividend Stock #1: AT&T (T)
Dividend Yield: 5.24% YTD Performance: 0.28% 52-Week Return: 2.29% AT&T (T) is the largest telecommunications provider in the United States and, when Amazon.com (AMZN) announced its new Fire smartphone last week, they chose to make AT&T the exclusive carrier. However, T stock failed to make a move on the news, as it is largely expected that the new addition to the smartphone space will not provide the same kind of boost to the company's bottom line as the iPhone did when it was first released on AT&T's network in the mid-2000s.
Part of the problem is that when the iPhone came out exclusively for AT&T, it was the first of its kind to hit the market. Now that smartphones have been around for almost a decade, T and AMZN are faced with the challenge of getting customers to replace their current smartphone for a brand-new one with much less name recognition than either the Apple (AAPL) iPhone or one of the Google (GOOG) Android models.
However, it seems as though T anticipated that this would be the case. At present, AT&T earns the majority of its revenue from its wireless segment, but just last month the company announced that it would buy satellite TV provider DirecTV (DTV) in a deal valued at approximately $67 billion. The acquisition will help T compete with companies like Comcast (CMCSA) and will allow it to meet the needs of customers who want phone, Internet and TV all from one provider.
While the stock will not likely see a run-up in its share price as a direct result of either deal, T pays a handsome 5.24% dividend yield, which makes it great for a long-term portfolio. Also, the stock trades at just 10.2 times earnings, an attractive valuation versus the 18.3 average for its peer group.
Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with the goal of maintaining a blended total yield of 10% across two portfolios. Bryan is also the editor of Extreme Income, which uses the power of historically cheap money to create a leveraged "baby hedge fund" strategy that paves the way to massive profits and 4x greater income.
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