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More U.S. companies of late are shunning shareholder dividends in favor of stock buybacks, which instantly boost per-share profits and typically goose share prices. But there are still reasons for investors to prefer dividends.
- Video: Buybacks vs. dividends
Not only do dividend-paying stocks typically outperform in the long term, they provide investors with a source of increasing income and yield: Dividends tend to rise each year and are pared or suspended only in troubled circumstances.
Using MSN Money's Deluxe Screener and screening parameters created by columnist Harry Domash, we identified 10 high-dividend-paying stocks that should have significant advantages if the market weakens in the coming months. Even in a bull market, dividend-paying stocks are compelling: Thanks to recent changes in federal law, most dividends are taxed at just 15%.
Among the stocks that the screen turned up May 17 is Altria Group (MO, news, msgs). The owner of the nation's biggest tobacco company had a profitable year in 2006 despite the continued decline in domestic cigarette consumption and governments' targeting of tobacco for additional excise taxes.
Altria improved its operating profit through cost savings and increased sales overseas. It owns the companies that make cigarettes under such brands as Marlboro, Virginia Slims, Parliament and Basic. On March 30, Altria completed its spinoff of slow-growing Kraft Foods (KFT, news, msgs), the nation's largest food and beverage company and the world's second-biggest, behind Nestle (NSRGY, news, msgs). Some analysts now see Altria as a "pure play" cigarette company.
(See the full list of stocks at the bottom of this page.)
Partner Communications (PTNR, news, msgs) also made it through the screen. It operates one of the biggest mobile-telecommunications networks in Israel, with more than 2.7 million customers, about one-third of the Israeli cell-phone market. The company, which operates under the Orange brand, recently began offering fixed-line services to corporate clients and has received licenses to operate as an Internet services provider and offer voice-over-Internet-protocol, or VOIP, phone services. American depositary receipts in Partner Communications are up 37% this year and have a dividend yield of 11.92%.
Apollo Investment (AINV, news, msgs) also made the cut. The New York firm invests primarily in midsized private companies. It was spun off in a 2004 initial public offering by Apollo Management, the private-buyout firm that recently agreed to acquire Harrah's Entertainment (HET, news, msgs), the world's biggest casino operator. Apollo Investment's most recent deal is its $1.5 billion all-cash offer for Innkeepers USA Trust, a hotel REIT and the owner of upscale extended-stay hotels. The trust owns 74 hotels, many under the Residence Inn and Hampton Inn brands.
The screen is based on the following parameters:
- A minimum dividend yield of 4.25%, to provide sufficient downside protection in a weak market.
- A positive "latest dividend rate" of 0.25 or better, to weed out companies with one-time payouts or dividends that have been discontinued.
- A closing price of at least $15 a share. Cheaper stocks are likely to have fundamental weaknesses.
- A market capitalization of at least $1 billion, to steer clear of smaller companies likely to be shunned by investors if the market deteriorates.
- A mean analyst rating of "moderate buy" or better.
- Return on equity of 8% or better. Return on equity, or net income divided by shareholder equity, is a common measure of profitability, and companies without profits are more likely to cut or eliminate their dividends.
- Forecasted earnings growth of 8% or better, because earnings growth typically translates to dividend growth.
- Fundamental and technical grades of C or better from MSN Money's StockScouter rating system. The fundamental grade is based on a company's earnings growth, including how it has performed relative to analysts' earnings expectations. The technical grade is based on a charting analysis of the stock's price movements.
Domash cautions that the dividend yield quoted on MSN Money and other financial sites assumes that the most recently declared dividend will continue unchanged over the next year. However, often that doesn't happen. Many companies adjust their payouts up or down during the year.
Investors, said columnist Domash, do best by picking stocks that increase their payouts. When that happens, the shareholder's dividend yield increases, and the increase often drives the stock higher. Conversely, a dividend cut hurts in two ways: Yield declines, and the dividend cut usually pressures the share price.
As a starting point for additional research, the screen offers investment ideas that could reward investors regardless of which way the market moves . For more details on the screening criteria, click here.
Here is a complete list of stocks uncovered by the screen May 17:
| Company | Industry | Dividend yield |
|---|---|---|
Telecommunications | 11.92 | |
Specialty finance | 9.72 | |
Asset management | 9.05 | |
Credit services | 9.00 | |
Regional airline | 8.35 | |
Credit services | 7.11 | |
Oil and gas | 5.89 | |
Movie theaters | 5.29 | |
Tobacco products | 4.96 | |
Financial services | 4.40 |
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