With U.S. interest rates at historic lows and, at best, moderate interest rate increases in store for the next year, the options available for income investors are few. With bonds and Treasury bills yielding less than 2 percent over a one- to five-year time horizon, dividend growth stocks are perhaps one of the few bright spots in the investing landscape. We screened for U.S.-traded stocks with a strong dividend yield and a track record of dividend growth and stock price appreciation.
The screen. We used Recognia Strategy Builder to search for U.S. stocks yielding more than a five-year Treasury that have demonstrated a track record of dividend growth and stock price appreciation. We began by setting a minimum market capitalization threshold of $10 billion. We wish to focus on the largest and most secure companies in our screen.
Next, we looked for U.S.-traded stocks with dividend yields of at least 2.5 percent. Yields on U.S. Treasuries are currently running at less than 2 percent all the way out to five years. A 2.5 percent dividend represents a nice premium over the best yield on a short-dated Treasury bill.
We also focused on companies whose dividends have been growing over the past five years. We screened for companies with dividend growth rates of at least 7.5 percent. Finally, to focus on companies with rising stock prices, we limited our list to companies whose share prices have appreciated by 10 percent or more over the past year. Here are the results:
The Western Union Company (symbol: WU), based in Colorado, tops our list with a dividend yield of 2.9 percent and a five-year average dividend growth rate of 79.1 percent. Although originally associated with the telegraph industry, Western Union today is a financial service stock focusing on money transfer services as its primary business. In May 2015, it was rumored that Western Union was in talks to buy its largest rival, money transfer firm MoneyGram. Western Union’s stock declined slightly on the news but has since rallied.
Cisco Systems Inc. (CSCO) is an industry leader in computer networking equipment. Although it has been thought of as a growth stock for most of its history, Cisco has transformed into a dividend growth stock in recent years. With a dividend yield of 2.9 percent and a 90.3 percent five-year dividend growth rate (the highest on our list), Cisco is an interesting candidate as an income-producing investment.
Kinder Morgan Inc. (KMI) is the highest-yielding stock on our list. The Houston-based company is the fourth-largest energy company in the U.S. and owns and operates a variety of pipelines and energy terminals in Canada and the U.S. The stock currently yields 4.9 percent, partly as a result of the 11 percent swoon in its stock price in the last six weeks. Despite this recent weakness, Kinder Morgan stock is still up 10.6 percent in the past year.
Microsoft Corp. (MSFT), like Cisco, is a one-time growth stock now appealing to a new generation of investors as a dividend growth stock. With a market capitalization of over $375 billion, Microsoft is the largest company on our list. The company currently pays a 2.7 percent dividend and has a five-year track record of annual increases averaging 16.6 percent. In late April, Microsoft released quarterly results that topped analyst expectations for both revenue and earnings. The stock rallied almost 14 percent on the news before falling back slightly.
Historical performance. Recognia Strategy Builder provides a backtesting capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had a 14.9 percent annualized return compared to 13.4 percent for the Standard & Poor’s 500 index and 11.4 percent for the Dow Jones industrial average.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
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4 Outstanding Income Stocks originally appeared on usnews.com
