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.