High Dividend Yielding Stocks

I am on the hunt for high dividend yielding stocks like the five Natural Gas (NG) and Oil producing Canada Trust companies (thanks Fullstacks and Mr. C.) that I started buying in 2004. For example, Penn West Energy Trust (PWE) and Pengrowth Energy Trust (PGH) were paying a 16% dividend in 2008. In less than five years the dividend payout would have exceeded your purchase price of the stock (rule of 72). After several years of paying a high dividend, two of my Canada trust companies were bought out for cash that exceeded my purchase price by over 50%. With the decrease in price of NG and Oil and the change in the Canada Trust tax law decreeing that, beginning in 2011, they will be taxed like other corporations, they have either lowered their dividend yield or stopped paying them (if they have become corporations). Currently PWE’s dividend yield is 8.8% and PGH’s yield is 8.3%. Starting in January 2011 with the change in the Canada tax law they’ll no longer be required to pay out 90% of their profits every month in dividends (this is similar to US Real Estate Investment Trust).

The following are my criteria for selecting companies that are paying high dividend yields (that shouldn’t be forced to reduce or stop dividend payout in the future and might be potential buyout candidates):

• Stock market capitalization greater than 2 billion US dollars. This would be defined as a mid cap company.

• Current dividend yield greater than 4.5%. Current Dow Jones Index (DIA) yield is 2.68% and S&P Index yield is 2.03%.

• Growth of dividend yield over the last 5 years greater than 6%. The company is continuing to increase their dividend payout over a defined number of years.

• Earnings Per Share (EPS) projected over the next 5 years should be greater than 8%. A trend indicating profit in the future will allow them to increase their dividends.

• Revenue growth over the last 3 years should be greater than .5%. This will indicate whether the profit growth is ‘quality’ profit growth (they are increasing revenue and controlling cost and not just reducing expenses to increase profits).

• Dividend payout ratios and insider (employees) percent of stock ownership. Dividend payout ratios (lower is better) is a good indicator of the company’s ability to continue to increase dividend payouts in the future. If insiders own a larger percent of the stock they are much more likely to continue to pay dividends since they get the same payout as you. The higher the insider ratio the better it should be for the stockholder.

• Industry sector. I am excluding Financial and REITs companies from the analysis so as to concentrate on companies in industries that can continue to grow with the current or future micro and macro economic conditions.

I utilized stock screeners to select companies to review. After trying a large number of stock screeners I chose the Fidelity stock screener (you need to have a Fidelity account to use it). It could perform each of my criteria except for dividend payout ratio (I will need to conduct research on the companies selected using the other criteria). The following companies were selected (listed from the highest rated by the Fidelity tool to the lowest):

· Compania Cervecerias Unidas S.A. (CCU) - The current dividend yield is 3.7%. There has been large increase in the stock price over the last 2 months at the end of the second quarter (June 30, 2010) the stock price was $43.09 and is currently around $58 (the stock screener tool used the end of second quarter dividend yield of 4.66%). CCU is headquartered in Chile and is a beverage company that principally engaged in beer production and distribution in Chile and Argentina. It also produces and sells wine, soft drinks, mineral water and other beverages. CCU has had 15% revenue growth over the last 3 years and dividend growth over the last 5 years of 20%. Its dividend payout ratio is outstanding at 38% and 21% of shares are owned by insiders. With future EPS growth over the next 5 years of 14% CCU should be able continue to increase its dividend payout. This was the highest rated selection by the Fidelity stock screener tool.

· Veolia Environnement (VE) – The current dividend yield is 5.2% and the stock price is around its 52 week low. VE is a France based company that provides environmental management services to individual, government and commercial customers worldwide. Its dividend payout ratio is high (not good) at 95% and 11% of its shares are owned by insiders. VE has had 10% revenue growth over the last 3 years and forecasted EPS growth of 10% over the next years.

· Paychex, Inc. (PAYX) - The current dividend yield is 5.2% and the stock price is around its 52 week low. PAYX provides payroll, human resource and benefits outsourcing solutions for small to medium size businesses in the US and Germany. By outsourcing to PAYX, their customers avoid employing fulltime employees to perform the activities. This is a growing trend in US business. Its dividend payout ratio is high (not good) at 94% and 10% of its shares are owned by insiders.

· Westar Energy Inc (WR) The current dividend yield is 5.2% and the stock price is around its 52 week high. WR is an electric utility company that is based in Kansas, US. It produces electricity from various sources, for example coal, natural gas and wind. Its dividend payout ratio is 78% and 1% of its shares are owned by insiders. Its EPS growth over the next 5 years is forecasted at 9%.

· RPM International Inc. (RPM) - The current dividend yield is 4.9%. RPM conducts manufacturing, marketing, and sales of various specialty chemical products to industrial and consumer markets worldwide. Its dividend payout ratio is 59 %( which is good) and 1.5% of its shares are owned by insiders. With future EPS growth over the next 5 years of 10% RPM should be able to continue to increase its dividend payout.

· Alliant Energy Corp. (LNT) - The current dividend yield is 4.5% and the stock price is around its 52 week high. Alliant Energy Corporation operates in electric and gas utility businesses in the United States. The company, through its subsidiary, Interstate Power and Light Company, engages in the generation and distribution of electric energy; and the distribution and transportation of natural gas in Iowa and southern Minnesota. Its payout ratio is 169% and 1% of the shares are held by insiders. This was the lowest rated company.

CCU’s business is staple goods such as beer, wine, water, etc. Staple goods sales and earnings growth tend to remain constant in good or bad economic times. During the current recession staple goods companies’ revenue and profit will remain stable (this can be used as a hedge against recession). Argentina’s and Chile’s forecasted 2010 and 2011 GDP growth is two times the US and this will help to continue to drive CCU revenue and profit growth. They have had a high ‘quality’ of profitability, their profit is growing at the same time their revenue has grown (their revenue has not remained the same; they have increased profit by cutting expenses, i.e. workers). At this time I will not buy CCU but I am putting it on my watch list waiting for a pullback of the stock price. The stock price is at a record high and has doubled in less than 20 months. In the event of a stock price a pullback I will re-evaluate my position. CCU could be a possible buyout candidate in the future.

I love water companies and VE provides water environment management services around the world. VE’s business is a growth industry around the world and especially in the emerging countries like Brazil, Russia, India and China (BRIC countries). The demand for safe and fresh drinking water will only continue to grow since currently there is a shortage. Clean fresh water is becoming blue gold (I used to use “blue oil” before the BP fiasco). There will continue to be large demand worldwide for years to come. I have owned United Utilities (UUGRY.PK) for the last 7 years and it’s currently paying a dividend yield of over 8%. UUGRY.PK is a water utility in England and also provides water management services worldwide. I will need to do more research on VE since it is at a 52 week stock price low.

You should research each of the companies that I talked about yourself before you making any decisions to buy the stock.

If you are planning to make your high paying dividend investment in a taxable account you should be aware of possible changes to qualifying dividend tax rate in the US in 2011. See my blog: http://paulsgang.blogspot.com/2010/07/investment-us-tax-changes-for-2011.html. In 2011 qualifying dividends will revert to their pre-Bush tax rate i.e. ordinary income based on your highest tax bracket. Bush’s tax cut of 2003 changed the qualified dividends tax rate from ordinary income (your highest income tax bracket) to the same as capital gains (15% for most people). Your tax rate could be as high as 39.6% if you are a high income earner. Congress could change it to be the same as long-term capital gains – 20% for most taxpayers – but I think it’s more likely they will not take action and it will return to the ordinary income rate of your highest tax bracket.

Please chime in with comments about the high dividend yielding stocks that I wrote about in my blog. Which ones, if any, would you buy or wait for a pullback in price? If you have any ideas about future blogs please add a comment. If there is any interest I could write about the 12 stock screener tools that I used with a quick evaluation of them. I am also starting to think about companies that would be good buyout candidates and in which sectors they might be (i.e. cloud computing). Companies in the US have over $2 trillion cash in the bank available for buying companies, capital improvements, increasing dividends payouts, etc.

© 2010 Paul Cusick