Since the expected return of a bond is its interest rate, fixed income investments are not very attractive for generating meaningful returns, notes Chuck Carlson, dividend reinvestment expert and editor of DRIP Investor.
After all, who wants to fix a return of only 2% per year for the next 30 years. That percentage will not even exceed inflation. And don’t get me started on rates on savings and checking accounts. I get no less than 0.05% on my checking account. The bottom line is that it is difficult to find a decent yield with sleds.
More from Chuck Carlson: Top Picks Semi-Annual Updates: Alphabet
To be sure, I’ve never been a fan of ‘yield chasing’. Return is a pretty good proxy for risk. High yields can be an illusion – often the highest yields belong to investments in which cash flows risk being reduced or eliminated and principal is evaporating. If you prefer yield in your investment search, consider the following:
Don’t stretch too far for yield. If you are considering investments with a return of more than 6%, keep in mind that there are many risks associated with the cash flows and principal. There is no free lunch and there is no such thing as a ‘risk-free’ return of 6%, especially in the current low interest rate environment.
Consider investments that can increase their cash flows. In the battle between dividend yield and dividend growth, I tend to favor dividend growth, especially for investors who tend to hold investments for long periods of time.
Dividend growth can turn a small yield into a large yield over time. Dividend growth also helps your cash flows keep pace or even outpace inflation. The bottom line: I would much rather own a stock that yields 3%, but grows the dividend regularly, than own a yield of 4% with no prospects for dividend growth.
When comparing returns from different asset classes, keep in mind that levels of risk may differ. For example, you run more risk if you own a stock with a return of 3% than a bond with a return of 3%. The expected volatility will be greater for the stock than for the bond.
One that has had my head spinning for the past few months is: Philip Morris International (P.M). Now I know there is a large group of investors who simply don’t want to own Philip Morris because of the company’s products. However, if you are not one of those investors, you should take a fresh look at these stocks.
The company has rapidly expanded its smoke-free products and this is a key differentiator for the company. Also keep in mind that Philip Morris focuses on overseas markets, which is a plus. Earnings per share estimates for 2021 and 2022 have risen over the past 60 days.
Also see: FIGS: “All About Scrubs”
The Philip Morris stock has behaved quite well in recent weeks, trading around its 52-week high. Still, I think the stock is misunderstood by a large investor population.
As more investors understand the transformation at the company, these stocks should go up. The company appears confident in its future as the company recently announced a $7 billion share repurchase program.
The company’s current dividend of $4.80 per share is well covered by earnings, which are expected to reach $6.09 in 2021 and $6.68 in 2022. The current yield of 4.8% is especially attractive in this low interest rate environment.
Note: Philip Morris offers a direct purchase subscription. Minimum initial investment is $500. The plan administrator is Computershare (www.computershare.com).
The banking sector has retreated somewhat during recent trading, in line with the recent decline in interest rates. The pullback provides a better buying opportunity in banking stocks, including: Regions Financial (RF).
I have been a longtime owner of Regions and I like the combination of dividend yield (3%) and valuation potential of the company. Financials are still one of the areas with reasonable valuations, so I like the opportunities for regions to hit new highs in the second half of the year. The stock offers a sort of hedge against rising interest rates.
The regions direct purchase plan has a minimum initial investment of $1,000. The plan administrator is Computershare (www.computershare.com).
A favorite within the utility sector is UGIA (UGI), the largest retailer of propane in the retail industry. The company also has utilities for natural gas and electricity.
The stock has been doing well lately and I expect these stocks to outperform the broad market in the second half of the year.
With a return of 3%, the company has paid dividends for more than 134 consecutive years. UGI offers a quality game in the utility sector. The minimum initial investment in UGI’s direct purchase plan is only $50. The plan administrator is Computershare (www.computershare.com)
More from MoneyShow.com: