How to Get Truly Huge Yields

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    Published Fri, 27 Apr 2012 12:55:09 EDT on The Motley Fool


    With interest rates and bond yields at extremely low levels, many investors are chasing the high yields offered by a number of risky dividend-paying stocks. But buying companies simply because of the size of the dividend isn't something more conservative investors should be doing. If a 10% to 15% yield is what you are looking for, you may not have to search as far as you think.
    What's your real yield?When you look at the performance of your portfolio, the return on investment is based off the price you paid for different stocks. So why don't we follow the same logic when looking at dividend yields of stocks? I'd say that when you own a stock and it pays a dividend, you shouldn't care about its current yield; instead, you should focus on the current dividend compared to the price you paid for the stock.
    For example, say you had bought the following four companies 10 years ago for your portfolio:
    Company
    April 2002Share Price
    Recent Share Price
    Current Annual Dividend per Share
    Yield Based on 2002 Price
    McDonald's (NYSE: MCD) $27.71 $97.29 $2.80 10.1% Chevron (NYSE: CVX) $43.23 $105.75 $3.24 7.5% Nucor (NYSE: NUE) $16.25 $39.22 $1.46 9% HCP (NYSE: HCP) $21.55 $41.36 $2.00 9.3% Source: Yahoo Finance; author's calculations. 2002 prices adjusted for splits.
    Over the years, rising dividends have increased the stocks' dividend yields when you compare them to their original share prices. Now, McDonald's pays 10% of your purchase price annually in dividends, and the others are getting close to double-digit percentage payouts.
    Sometimes this works even better with growth companies that don't even pay dividends at the time you buy them. For instance, if you had bought Apple 10 years ago, you would have paid less than $13 per split-adjusted share. With Apple's new dividend of $2.65 per quarter, you'll have your entire initial investment paid back to you in the first five quarters.
    Still worth buying?As you can see, these five companies would all have made wonderful buys 10 years ago, but the real question is, "Are they still worth buying today?" I believe they are. Other than Apple, these companies have all boosted their annual dividend payouts every year for 25 years or more. But more importantly, each of these companies has specifics that make it worth buying.
    McDonald's is the clear-cut leader in the fast food business, with No. 1 market share in nearly all of the countries in which it does business. The golden arches saw same-store sales increase 7.3% in the most recent quarter. Its growth continues to impress.
    Chevron may be in second place behind Exxon in terms of market cap among U.S. oil companies, but Chevron's dividend yield is significantly higher than Exxon's, even after both of them raised their payouts recently. Chevron also has a cheaper valuation than Exxon based on earnings.
    Nucor bears the title of North America's largest recycler, with steel production and scrap-metals brokerage among its businesses. The company's modern and efficient "mini-mills" format helps save the company on costs, helping it stand out from many of its peers.
    HCP currently boasts a portfolio of over 1,000 health-care facilities, and with an aging U.S. population, future revenue should remain fairly consistent. The company gets the majority of its revenue from senior housing and skilled-nursing properties, and a big portion of its sales comes from private-pay patients, rather than government reimbursements, helping shelter it from health-care reform effects.
    Last but not least, while most investors talk about Apple's future growth prospects, I believe you should buy it for the dividend. Based on first-quarter earnings per share, Apple's dividend payout ratio will be around 21%. If Apple continues to grow rapidly, and management wants to keep the payout ratio around 20% to 25%, the dividend will also continue to rapidly increase. If growth slows down to a normal pace, the board still has plenty of room to increase the dividend, as the payout ratio is low (not to mention Apple's $110 billion in cash sitting in the bank.)... Read more

    Stock name                                     ISIN Last trade   P/E Earnings/Share Dividend/Share Dividend yield
    HCP P/E of HCP on Bloomberg Quote of HCP on CNNMoney FT.com - HCP:NYS P/E ratio of HCP on Google Finance Dividend yield HCP on Morningstar Dividend HCP on MSN Money Dividend HCP on Reuters HCP dividend US40414L1098 55.28   28.1 1.95 2.10 3.80
    CHEVRON P/E of CHEVRON on Bloomberg Quote of CHEVRON on CNNMoney FT.com - CVX:NYS P/E ratio of CHEVRON on Google Finance Dividend yield CHEVRON on Morningstar Dividend CHEVRON on MSN Money Dividend CHEVRON on Reuters CHEVRON dividend US1667641005 125.94   9.4 13.23 4.00 3.18
    NUCOR P/E of NUCOR on Bloomberg Quote of NUCOR on CNNMoney FT.com - NUE:NYS P/E ratio of NUCOR on Google Finance Dividend yield NUCOR on Morningstar Dividend NUCOR on MSN Money Dividend NUCOR on Reuters NUCOR dividend US6703461052 47.10   33.2 1.39 1.47 3.12
    MCDONALDS P/E of MCDONALDS on Bloomberg Quote of MCDONALDS on CNNMoney FT.com - MCD:NYS P/E ratio of MCDONALDS on Google Finance Dividend yield MCDONALDS on Morningstar Dividend MCDONALDS on MSN Money Dividend MCDONALDS on Reuters MCDONALDS dividend US5801351017 102.14   18.8 5.39 3.08 3.02

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