Three Highly Profitable, 5% Yielding Dividend Stocks

Bob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Investing for income is becoming a scary proposition. As stock prices rise and, consequently, yields fall, finding substantial income in today’s market is a tough job. Despite the recent spike in interest rates, rates remain punishingly low for those with savings who want to earn income from their investments.

As a result, investors may be tempted to chase yield from speculative stocks or sectors of the market that are obscure and fraught with risk. Never fear, investors: there are still highly profitable stocks from easily understood industries that pay you 5% or more to own them.

Look here for hefty yields

Telecom giant AT&T (NYSE: T) almost needs no introduction. The company is a Dow 30 component and is one of the most well-known and valuable brands in the world. AT&T carries a $190 billion market capitalization and has provided slow-and-steady returns for decades.

In its most recent quarterly report, AT&T again displayed what its investors take for granted: reliable growth and solid cash flow. The company posted 12% higher quarterly diluted earnings per share year over year, and nearly $4 billion in free cash flow.

Like most telecoms, AT&T uses the bulk of its free cash flow to pay a generous dividend to shareholders. The company last raised its dividend in the fall of 2012, marking the 29th consecutive year of a dividend increase. At recent prices, the stock yields 5.1% annualized.

Two more in the energy space

On the topic of fantastic cash flow generation and hefty dividend yields, the energy sector has many names that fit the bill. That shouldn’t come as much of a surprise; after all, the world, and in particular emerging economies, have a seemingly unquenchable thirst for energy.

This has resulted in massive profits (and dividends) for investors. One high-yielding international energy company is Royal Dutch Shell PLC (NYSE: RDS-B), which is based in the Netherlands.

In May, the company announced first-quarter earnings grew 3% to $7.5 billion, and its oil production increased 2% year over year.

Royal Dutch Shell not only pays a big dividend, but the company actually increased its most recent payout by nearly 5%.

The company’s $3.60 per-share annualized payout yields nearly 5.5% at recent prices. Of course, an integrated energy company like Royal Dutch Shell is critically tied to oil prices. Should oil prices fall considerably, as they did in the most recent recession, the company will have trouble maintaining future dividend increases.

That’s where Master Limited Partnerships come in handy. Oil and gas MLP’s, as opposed to traditional oil companies, are not dependent on high oil prices to maintain their cash flows. MLP’s operate tanks and pipelines used to store and transport oil and gas products, and are therefore much more like toll roads.

The price of oil itself is not a huge factor for an oil and gas MLP like Kinder Morgan Energy Partners L.P. (NYSE: KMP), which has raised its distribution in good times and bad over the past several years. To illustrate, consider that the company has increased its distribution every quarter since 2010. In fact, the partnership’s last quarterly distribution was 8% higher than the same distribution one year prior.

Moreover, the great thing about MLP’s is that they are required to distribute the bulk of their cash flows as payouts to unit holders in exchange for a favorable tax structure. That’s why, even in today’s low-rate environment, Kinder Morgan yields more than 6% at recent prices.

There’s still safe yield to be found

Investors looking for income in today’s investing environment don’t need to chase yield from speculative companies with collapsing stock prices. AT&T, Royal Dutch Shell, and Kinder Morgan Partners are all extremely large, profitable businesses that provide products and services we use on a daily basis.

In particular, Royal Dutch Shell and Kinder Morgan look especially attractive to me. I’ve initiated a position in KMP in recent weeks, and I’ve added Royal Dutch Shell to my watch list. Should the stock fall any further, I’ll be very tempted to step in and buy.

On AT&T, while I appreciate the stock’s 5% yield, it’s worth noting that the stock has rallied considerably in a relatively short period of time. I’d advise investors to wait for a pullback, but if the stock approaches a 5.5% yield, it would be a good buying opportunity. In all, with the help of these three stocks, investors can still secure 5% yields.  Even in today’s market, you can provide your portfolio with significant income for many years.

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Robert Ciura owns shares of Kinder Morgan Energy Partners LP. The Motley Fool has no position in any of the stocks mentioned. 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!

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