Best Long Term Stock Ideas

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>>> 6 stocks with big, safe dividends


Shares with the highest payouts sometimes come with similarly lofty risks. These high-yielding names, for the most part, do not.




By Jon C. Ogg and Thomas C. Frohlich

24/7 Wall St.



http://money.msn.com/how-to-invest/c_galleryregular.aspx?cp-documentid=253818886




Get higher yields, not blood pressure


Dividend payments by S&P 500 ($INX) companies reached an all-time high last year, totaling some $330.8 billion, according to FactSet. As of this March, 418 of the 500 companies in the index paid a dividend.

However, not all dividends are created equal. Of the 500 companies in the index, 96 pay their shareholders a dividend of 3 percent or more. As a rough comparison, a 10-year Treasury note yields close to 2.5 percent. While Treasury securities come with a virtual guarantee of a return of principal, share price appreciation is generally expected to provide higher returns. Dividends are intended to make those returns even better over time.

Dividends are considered among the most straightforward ways for a company to reward investors. After all, they represent a direct transfer of cash from the company back to its shareholders. However, a high dividend yield alone does not give a complete picture of the value of an investment. The financial health and business prospects of the company have to be considered as well. Investors need to be able to differentiate a high dividend from a safe dividend.

Surprisingly, some companies pay dividends even when they lose money. For example, Windstream Holdings (WIN), with a 10.4 percent dividend yield, actually pays out three times its trailing 12-month earnings in dividends. However, such a combination of high payouts and unprofitability is not sustainable.

To identify the highest-yielding S&P 500 stocks that are safe for investors, 24/7 Wall St. reviewed the companies that are currently paying dividends of 3 percent or more. We excluded any company with a market capitalization of less than $10 billion. We also eliminated companies that we believe cannot afford to maintain their dividends or for which a net loss is expected. Many of the dividends and earnings figures are based on forward-looking analyst estimates.

We generally put a limit on the income payout rate at 80 percent, meaning that companies must retain 20 percent of their expected earnings this year and next year for other uses, such as share buybacks and growth opportunities. This excluded the real estate investment trusts (REITs), which pay out almost all income to maintain their special tax structures.

Companies involved in transformative mergers or acquisitions were excluded if the combination could potentially place the dividend at risk. We also only included only two utility companies, which typically pay very high dividends, since this would have otherwise skewed our results largely toward that sector.


AT&T


Dividend yield: 5.2 percent
Annualized dividend: $1.84
Share price: $35
P/E ratio: 13.2

AT&T (T) is one of the nation's leading telecommunications companies. It is the highest-yielding stock in the Dow Jones Industrial Average ($INDU), with a dividend yield of 5.2 percent.

AT&T recently agreed to acquire satellite television provider DirecTV (DTV) for $48.5 billion. While this may seem like a large amount, the company had more than $18 billion in earnings last year alone. While we excluded many companies in the midst of mergers or acquisitions, we made an exception for AT&T, as we determined at the time of the deal's announcement that it was unlikely the dividend would be affected by the transaction.

Many of AT&T's businesses are cash cows, allowing the company to spend roughly $21 billion in cash last year on capital expenditures, while paying nearly $10 billion in dividends and spending more than $13 billion on share buybacks.


Southern Company


Dividend yield: 4.8 percent
Annualized dividend: $2.10
Share price: $44
P/E ratio: 15.7

Southern Company (SO), based in Atlanta, is a utilities holding company operating in four southeastern states. It currently has a 4.8 percent dividend yield and a market cap of about $39 billion. Southern Company has a track record of consistently growing its dividend, which now pays out $2.10 per share on an annualized basis.

Recently, the company has experienced delays and cost overruns in the construction of its Kemper County, Miss., coal facility. This, along with other issues, prompted investment bank UBS to issue a "Sell" rating on the stock. The Kemper plant is designed to produce energy from coal in a more environmentally friendly manner by implementing carbon capture and storage technology. Despite the cost, Moody's maintained the company's credit rating for its senior unsecured debt at an investment grade Baa1 with a stable outlook.


Consolidated Edison


Dividend yield: 4.5 percent
Annualized dividend: $2.52
Share price: $55
P/E ratio: 14.7

Consolidated Edison (ED) is a utility company supplying electricity and gas to much of New York City and nearby Westchester County. Because ConEd is a regulated utility, it has to gain approval from the state to increase charges to customers for parts of their monthly bills. The company's most recent efforts to increase rates were rejected by the state.

Despite this, the company has long been considered relatively safe and stable. It currently offers a dividend yield of 4.5 percent, with a payout ratio of only about 67 percent, which is very safe for a utility.


Altria


Dividend yield: 4.7 percent
Annualized dividend: $1.92
Share price: $42
P/E ratio: 16.4

Altria Group (MO) is one of the largest tobacco companies in the world, with a market capitalization of $82.5 billion. Currently, the company's shares trade at $41.56, with a dividend yield of 4.7 percent.

The company has been operating in a shrinking industry as U.S. adult smoking rates have been declining for decades, from 42.4 percent in 1965 to just 19 percent in 2011, according to the most recent data from the Centers for Disease Control and Prevention.

Its closest competitor, Reynolds American (RAI), was excluded from the list this year despite offering a 4.6 percent dividend yield. This was largely because Reynolds is said to be in talks to acquire rival Lorillard (LO). Until a deal is reached, it is not possible to determine what the company's combined balance sheet would look like.


Chevron


Dividend yield: 3.5 percent
Annualized dividend: $4.28
Share price: $125
P/E ratio: 11.7

Chevron (CVX) is one of the nation's largest energy companies with operations throughout the globe. Chevron reported more than $220 billion in operating revenue last year, with earnings exceeding $21 billion, and cash from operations surpassing $35 billion. Its dividend payments totaled $7.5 billion.

The highly profitable company has benefited from a growing U.S. energy industry. With the rise of unconventional drilling, the company has announced plans to expand its production in Texas's oil-rich Permian shale, and it is also active in Pennsylvania's Marcellus shale, which is a major source of natural gas. The dividend yield of Chevron shares is currently 3.5 percent, and it looks as though Chevron has the means to keep increasing its dividend for years.

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