As interest rates have plunged over the past five years, many income investors have gone to leveraged high-yield funds and emerging market debt funds. While the risk was much higher, the continued decline in rates provided a tailwind for these investments. That worked well for years, but those days may be drawing to a close as interest rates have gone much higher over the past year, and many feel they will continue on an upward trend.
It is highly unlikely we will see a 10-year Treasury bond yield at 5%, as we had in 2007, any time soon. Yet, rates likely are going higher over the next couple of years. In a new research report, Savita Subramanian, the outstanding equity and quant strategist at BofA Securities, makes the case that conservative growth and income investors now need to focus on “secure dividend” stocks. She noted this in the report:
We prefer high quality and secure – not high – dividend yield companies. For more conservative investors, we suggest a focus on our secure dividend screens such as Quintile 2 of the Russell 1000 by dividend yield. Why not seek out the highest dividend yield? Before companies cut their dividends, yields tend to skyrocket. After a company cuts, the underperformance is typically significant (-10% on average) and long-lived (often multiple years before performance bottoms). How do you avoid the cutters? Look for three things: 1) low leverage ratios; 2) low earnings-per-share variability (stable earnings-per-share means stable dividends); and 3) low payout ratios (more wiggle room in a downturn).
We screened the Quintile 2 stocks looking for the stocks paying the highest secure dividends that are also Buy rated at BofA Securities. They are listed here starting with the highest dividend-paying companies.
This consumer staples leader is a safe bet for nervous investors. Kimberly-Clark Corp. (NYSE: KMB) is a manufacturer of tissue, personal care, and health care products. Global brands include Huggies, Kotex, Kleenex, Cottonelle, Viva, Scott, Depend and Poise, as well as Andrex in the United Kingdom.
Last week the company announced that it is notifying U.S. and Canada customers about plans to increase net selling prices for most of its North American consumer products business. The analysts noted that the percentage increase in prices will be in the mid-to-high single digits. Almost all price hikes are expected to come into effect by the end of June. The hikes will be carried out via changes in list prices. In addition, Kimberly-Clark’s baby and child care, adult care and Scott bathroom tissue businesses will be affected by this move.
In a very positive move for investors, the company also raised the dividend in March by 6.5% to $1.14 per share. The dividend increase means investors receive a 3.29% yield. BofA Securities has a $155 price objective for the shares, while the Wall Street consensus target price is $146.37. Kimberly-Clark stock closed trading on Monday at $138.43 a share.
This is a very solid defensive play. Sempra Energy (NYSE: SRE) is a natural gas transmission and distribution company headquartered in San Diego. The company’s California Utilities segment distributes gas and electricity to approximately 25 million customers in southern California via South California Gas and San Diego Gas and Electric.
The company announced Monday that it has entered into a definitive agreement to sell a non-controlling 20% interest in its new business platform, Sempra Infrastructure Partners, to KKR for $3.37 billion in cash. KKR is a leading global investment firm. This transaction values Sempra Infrastructure Partners at approximately $25.2 billion, including expected asset-related debt at closing of $8.37 billion.
BofA Securities sees the transaction accretive to the firm’s sum-of-the-parts multiple of 13 times enterprise value/EBITDA, and it is within the elevated range that was expected. They also feel that Wall Street will have a positive reaction despite boosted expectations. The use of proceeds of the sale will be a key talking point at the firm’s analyst day in June.
Shareholders receive a 3.29% dividend. The BofA Securities price target of $136 is below the $144 consensus target. Sempra Energy stock closed on Monday at $133.84 per share.
This remains a top Warren Buffet holding and offers not only safety but also an incredibly strong worldwide brand with 40% overseas sales. Coca-Cola Co. (NYSE: KO) is the world’s largest beverage company, refreshing consumers with more than 500 sparkling and still brands.
Led by Coca-Cola, one of the world’s most valuable brands, the company’s portfolio features 20 billion-dollar brands including Diet Coke, Fanta, Sprite, Coca-Cola Zero, vitaminwater, Powerade, Minute Maid, Simply, Georgia and Del Valle. Globally, it is the number one provider of sparkling beverages, ready-to-drink coffees and juices and juice drinks.
Through the world’s largest beverage distribution system, consumers in more than 200 countries enjoy Coca-Cola beverages at a rate of more than 1.9 billion servings a day. Also remember that the company also owns 16.7% of Monster Beverage, which continues to deliver big numbers.
Holders of Coca-Cola stock receive a 3.18% dividend. The $56 BofA Securities price target is less than the $57.50 consensus target. Shares closed at $52.81 on Monday.
This seemingly off-the-radar company makes great sense for investors looking for a solid regional winner. Truist Financial Corp. (NYSE: TFC) is a bank holding company, incorporated in North Carolina and headquartered in Charlotte. The company was formerly known as BB&T, but it changed its name in December 2019 upon the acquisition of SunTrust Banks.
The complete transition to the Truist brand is expected to take about two years. Until then, customers of both BB&T and SunTrust will be served through their respective bank branches using the same apps, websites and services as before the merger closed. As part of the regulatory approval process, the new company will sell off 30 SunTrust branches in North Carolina, Virginia and Georgia to First Horizon Bank and divest $2.4 billion in deposits to “mitigate the competitive effects of the merger,” according to the Federal Reserve.
Truist’s footprint is located in one of the strongest and fastest-growing regions of the United States, and the analysts expect the company to maintain a competitive advantage over many of its competitors headquartered outside its footprint due to its being physically located in the southeast part of the country.
Investors receive a 3.04% dividend. BofA Securities has set a $66 target. The consensus figure is $61.70, and Truist Financial stock closed most recently at $59.15.
Essex Property Trust
This is an outstanding way for investors looking to add a real estate position to growth and income portfolios. Essex Property Trust Inc. (NYSE: ESS) is a fully integrated real estate investment trust (REIT) that acquires, develops, redevelops and manages apartment communities primarily located in the southern and northern California markets and Seattle. As of the fourth quarter of 2020, Essex had ownership interests in 250 apartment communities with an additional six properties in various stages of active development.
Essex Property Trust was able to grow earnings by 30% in the past 12 months. While the share price gain of 38% has outpaced the earnings growth, it seems to indicate that Wall Street is now more optimistic about the stock. Essex raised its dividend 0.6% for the upcoming April 15 payment date, giving the trust 27 consecutive years of dividend growth. The dividend has a compound annual growth rate of 7.2% since 2011.
Shareholders receive a 3.03% dividend. The BofA Securities price target is $309. The $279.42 consensus target compares with Monday’s closing price of $275.80.
While investors are probably salivating after Monday’s huge market moves, the reality is the stock market is extremely pricey and stocks are trading at some of the highest multiples in years. For more conservative growth and income investors, moving to these secure dividend companies now makes sense.
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