Published Thu, 21 Feb 2019 14:49:06 on Income Investors
Collect Oversized Dividends From Large-Cap Stocks
Let’s be honest here. While everyone wants to capitalize on the growth potential of small-cap stocks, if risk-averse income investors were presented with a choice between companies of different sizes, most of them will probably go with the big ones.
The reason is simple: for a company to have a large market capitalization, it needs to have a large enough business to support that valuation. As a result, large-cap stocks tend to be more established than their mid-cap and small-cap counterparts.
Moreover, big companies with entrenched market positions often generate recurring profits. Therefore, large-cap stocks can also set up generous dividend policies.
Still, nothing is perfect. In the case of large-cap stocks, their appeal to risk-averse investors could be a hindrance to yield hunters.
You see, at a given cash dividend rate, a company’s dividend yield moves inversely to its share price. Because large-cap stocks are always highly sought after, investors have already pushed their share prices over the years, causing their yields to drop.
It doesn’t help the case that the market sell-off in the fourth quarter of 2018 sent investors looking for safer investments. Because quite a few large-cap companies have durable business models, investors rushed toward them during the market panic, sending their stock prices even higher.
The result is that large-cap stocks are not known for their yield in today’s market.
So, what kind of dividend income can investors expect to get with these companies?
Well, if you take a look at the S&P 500 Index, which is made up of the 500 largest publicly traded companies in the U.S. by market value, you’d see that the average dividend yield of its components is a measly 1.94%. (Source: “S&P 500 Dividend Yield,” Multpl.com, last accessed February 15, 2019.)
A yield like this is simply too low to meet the needs of a typical income investor. If you want to earn $10,000 in dividends a year from a portfolio that yields 1.94%, you would need to put a staggering $515,464 in that portfolio first ($515,464 x 0.0194 = $10,000).
If you think spending over half a million to earn $10,000 doesn’t seem that appealing, you might want to check out the three companies I’m about to show you. They are all large-cap stocks, commanding market capitalizations of over $10.0 billion, and yet they provide yields from 6.7% all the way up to 11.7%.
3 Large-Cap Stocks with High Dividend Yields
Company Name Stock Exchange Ticker Symbol Market Capitalization Dividend Yield AT&T Inc. NYSE T $221.5 Billion 6.7% Energy Transfer LP NYSE ET $39.8 Billion 8.0% Annaly Capital Management Inc NYSE NLY $15.1 Billion 11.8% Source: Yahoo! Finance, last accessed February 19, 2019.
1. AT&T Inc.
First on the list is a familiar name to investors: AT&T Inc. (NYSE: T). Commanding a market capitalization of over $221.0 billion, AT&T is not just a regular large-cap stock, it’s one of the biggest companies in the world.
Headquartered in Dallas, Texas, AT&T is a multinational telecommunications, media, and entertainment conglomerate. The company has four operating segments: WarnerMedia, AT&T Communications, AT&T Latin America, and Xandr.
Notably, AT&T Communications provides TV, mobile, and broadband services to more than 100 million consumers in the U.S. Meanwhile, the company’s WarnerMedia segment offers some of the popular content in the entertainment business thanks to subsidiaries like HBO, Warner Bros., and Turner.
Due to AT&T’s established business, the company can pay solid dividends. The best part is that over the years, T stock dished out not just a stable dividend, but an increasing one.
In fact, AT&T has raised its dividend every year for 35 consecutive years. That makes it a Dividend Aristocrat, which is a title given to companies with at least 25 consecutive years of annual dividend increases. (Source: “AT&T Inc. Historical Dividend Data,” AT&T Inc., last accessed February 15, 2019.)
The payout is also safe. In 2018, the company generated $22.4 billion in free cash flow, representing a 36% increase year-over-year. And since AT&T’s dividend payments totaled $13.4 billion during the year, it was paying out just 60% of its free cash flow. This leaves a wide margin of safety and gives management plenty of room for future dividend increases. (Source: “AT&T Reports Fourth-Quarter Results,” AT&T Inc., January 30, 2019.)
Despite being a rock-solid dividend-payer, AT&T stock hasn’t been a hot commodity. Over the past 12 months, the company’s share price tumbled more than 18%.
Now, remember the inverse relationship between stock price and dividend yield I talked about earlier?
In the case of T stock, the drop in share price, combined with a recent payout increase, boosted its yield up to 6.7%. For investors looking to earn oversized income from large-cap stocks, AT&T Inc. is worth a serious look.
2. Energy Transfer LP
Compared to AT&T, Energy Transfer LP (NYSE: ET) is a much lesser-known name, but its business is still very, very established. And with a market cap of nearly $40.0 billion, it’s also a large-cap stock.
The partnership owns and operates one of the largest portfolios of energy assets in the U.S. and has a presence in all of the major domestic production basins. Through these assets, ET provides a wide range of services, including natural gas transportation, crude oil, natural gas liquids (NGL), and refined products transportation and terminalling, NGL fractionation, just to name a few.
Running energy pipelines and terminals doesn’t sound like an exciting business, but the business gushes cash flow. As a result, Energy Transfer LP can return a sizable amount of cash to investors on a regular basis.
Last month, the partnership announced a quarterly cash distribution of $0.305 per common unit, giving ET stock an annual yield of 8.1%.
Energy Transfer is yet to report full-year 2018 earnings, but its results in the first three quarters of the year were more than impressive. During this period, the partnership generated $3.879 billion in distributable cash flow while paying out $2.308 billion in actual cash distributions. That translated to a distribution coverage ratio of 1.68 times. (Source: “Energy Transfer Reports Third Quarter 2018 Results with Record Financial and Operational Performance,” Energy Transfer LP, November 7, 2018.)
In other words, Energy Transfer LP generated 68% more cash than what was needed to meet its distribution obligations. Going forward, management expects the partnership to have a distribution coverage ratio of 1.7 times to 1.9 times. If the partnership achieves this guidance range, its payout would be more than safe. (Source: “2019 UBS Midstream, MLP & Utilities Conference,” Energy Transfer LP, last accessed February 19, 2019.)
3. Annaly Capital Management Inc
The third large-cap company on the list comes from one of my favorite industries for income generation: real estate. However, it is not a landlord like most real estate investment trusts (REITs). Instead, the company focuses on the financing side of the business.
Annaly Capital Management Inc (NYSE: NLY) is a mortgage REIT headquartered in New York City. The company has a huge portfolio of agency mortgage-backed securities (MBS), meaning the principal and interest payments of the underlying mortgages are guaranteed by the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Government National Mortgage Association (Ginnie Mae).
Having a portfolio of investments backed by government agencies is certainly a welcoming sign for risk-averse investors. The business is also quite profitable, as Annaly Agency Group—the company’s lending segment that focuses on agency MBS—generates levered returns of 10% to 12%. (Source: “Fourth Quarter 2018 Investor Presentation,” Annaly Capital Management Inc, last accessed February 19, 2019.)
Annaly Capital also has other lending segments, which invests in non-agency MBS, commercial mortgage loans, and even private equity-backed middle market companies. But Annaly Agency Group is by far the company’s biggest segment in terms of assets.
And because Annaly Capital Management chooses to be regulated as a REIT, the company is required by law to distribute most of its profits to investors.
Right now, NLY stock pays quarterly dividends of $0.30 per share, which comes out to a jaw-dropping yield of 11.8%.
For those wondering whether a double-digit yield is too good to be true in today’s market, let’s take a look at NLY’s latest earnings report.
In 2018, Annaly Capital generated core earnings of $1.20 per share while declaring total dividends of $1.20 per share. So while the business earned enough profits to support the payout, it did not leave any room for error. (Source: “Annaly Capital Management, Inc. Reports 4th Quarter 2018 Results,” Annaly Capital Management Inc, February 13, 2019.)
Final Thoughts on High-Yield Large-Cap Stocks
At the end of the day, I want to point out that for investors who are trying to build a retirement nest egg, divided yield shouldn’t be the only focus. Sure, large-cap stocks are generally considered safer than small-cap names, but the dividends of ultra-high yielders are not always carved in stone.
What long-term investors should do, in my opinion, is find generous dividend-payers that have the ability to grow their payouts. This way, even if the current yield may not be that high, investors who purchase solid dividend-growth stocks can expect to earn a much higher yield-on-cost as times goes by.
Still, for those who are determined to earn an oversized yield today, the three large-cap stocks we just discussed should provide a good reference point.
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|Stock name||Last trade||P/E||Earnings/Share||Dividend/Share||Dividend yield|
|ANNALY CAPITAL MANAGEMENT||10.32||64.5||0.16||1.20||11.60|
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