3 Consumer Stocks Yielding Over 4%
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It can be useful for income investors to see to it that their portfolio is diversified among different sectors of the economy. While it’s easy to find high yielding stocks in some sectors (including utilities and telecoms), it can be more challenging to find, for example, consumer stocks which pay strong dividends and aren’t unattractive due to some other factor. Using data from Fidelity, here are three consumer stocks with a market capitalization of at least $2 billion which currently pay dividend yields of more than 4%:
Some of the best examples of high yielding consumer stocks are cigarette companies, such as Altria (NYSE: MO). Altria has been making quarterly dividend payments of $0.44 per share for about a year, resulting in a 4.8% annual yield at current prices, and based on historical patterns, it might be expected to increase its dividend soon. In addition, the beta of 0.5 means that Altria has little exposure to the overall economy. Of course, cigarettes are hardly a growth industry, particularly in the more mature markets which Altria focuses on (the company was formed from the split of Philip Morris) and revenue has been in decline. However, at least in recent times Altria has been able to offset this with lower costs and excise taxes with the result being that net income was up about 10% last quarter compared to Q2 2012.
Insider Monkey tracks quarterly 13F filings from hundreds of hedge funds as part of our work developing investment strategies (for example, we have found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year), and can see that Renaissance Technologies, founded by billionaire Jim Simons, owned 1.7 million shares of Altria as of the end of Q1 (find Renaissance's favorite stocks). Other high yield names in cigarettes include Lorillard and Reynolds American.
Two more high yield picks
Darden Restaurants (NYSE: DRI), whose brands include Red Lobster and Olive Garden, has seen its stock price go essentially nowhere over the last year as business conditions have been weak; the company’s fiscal year ended in May, and while revenue rose 7% compared to the previous fiscal year, net income fell 13%. However, Darden has been increasing its dividend payments and now offers a yield of 4.4%. Billionaire Ken Griffin’s Citadel Investment Group increased its stake to 2.2 million shares between January and March (see Griffin's stock picks).
The spread of smartphone apps from Google and Apple ecosystems as a substitute for GPS devices has caused trouble for Garmin (NASDAQ: GRMN), though the company continues to generate a good deal of cash and its dividend yield is about 5%. However, investors have a right to be highly skeptical that the company will be able to sustain its current business in the future. Smartphone penetration is increasing worldwide and mapping and directions apps have the potential to offer more features, more frequent updates, and more interaction (for example, it should be easier for these apps to include commands for finding nearby gas stations or restaurants).
Garmin’s most recent quarterly report showed sales declining 4% compared to the same period in the previous year, suggesting that at least for now, competition is having a negative effect, but not a particularly strong one. However, the business’ costs have not changed by much and so, the 10-Q records a nearly 20% decrease in pre-tax income (with the earnings picture only looking better due to a lower effective tax rate). Even with its high yield, 11% of the float is held short as many market players are bearish. Wall Street analysts expect EPS to decline in 2014, resulting in a forward P/E of 15, and while the company does have $1.2 billion in cash, this doesn’t help produce an attractive EV/EBITDA multiple.
These stocks have high yields, but income investors should be wary in most cases. Garmin looks expensive considering the competitive challenges it faces, and Darden also appears a bit dicey given the stock’s recent financial performance. Altria seems to be a more dependable investment and so, income investors could certainly look at it and at the cigarette industry more generally.
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This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Darden Restaurants. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!