Evaluate High Yield Stocks Carefully

When a stock carries a high yield, there is an underlying reason. Here are some questions to consider to help you understand the stock:

- Is the high yield a result of a sudden drop in price?
- Is the high yield above the industry average?
- Is the high yield above the stocks average?
- Is the high yield a result of a widespread economic downturn?
- Is the high yield a result of a company specific problem?

Be Honest In Your Evaluation

They say statistics can be used to prove anything. In the same vein, if you are determined to buy a stock, an analysis can be constructed to support the position. Instead of trying to find a reason to buy the stock, look for all the reasons NOT to buy the stock. Then weigh the positives against the negatives. Does the stock still look as appealing?

Start With List of Higher Quality Stocks

If you are looking for high yield, the temptation is to use a stock screen to search for yield and apply it to the entire universe of stocks. As this screen demonstrates, yield is easy to find. Add in growth and sustainability, then the list will dramatically shrink. Currently, I track 198 dividend growth stocks. The list is made up of Dividend Aristocrats, Achievers, Champions and few other dividend stocks for good measure. Below is a list of the stocks from my database yielding more than 5% and with 15 more years of consecutive dividend growth:

Investors Real Estate Trust (IRET)
Yield: 7.7% | Years of Growth: 36
The REIT engages engages in the ownership and operation of income-producing real estate properties in the United States.

CenturyLink, Inc. (CTL)
Yield: 6.9% | Years of Growth: 37
CTL acquired larger telecom peer Embarq in a stock deal in July 2009. Combined, the company provides voice service to 6.7 million customers and Internet service to 2.4 million customers in rural towns as well as larger cities such as Las Vegas.

Universal Health Realty Income Trust (UHT)
Yield: 6.7% | Years of Growth: 24
UHT, a real estate investment trust (REIT), invests in healthcare and human service related facilities.

National Retail Properties, Inc. (NNN)
Yield: 6.1% | Years of Growth: 19
This REIT invests in high-quality, freestanding retail properties subject to long-term net leases with major retail tenants.

AT&T Inc. (T)
Yield: 5.9% | Years of Growth: 27
AT&T Inc. provides telephone and broadband service and holds full ownership of AT&T Mobility (formerly Cingular Wireless). AT&T Corp. was acquired in late 2005 and BellSouth in late 2006.

Buckeye Partners LP (BPL)
Yield: 5.7% | Years of Growth: 15
BLP is one of the largest independent U.S. pipeline common carriers of refined petroleum products, with over 5,400 miles of pipeline.

Mercury General Corp. (MCY)
Yield: 5.6% | Years of Growth: 23
Mercury General Corp. is an insurance holding company, operating primarily in California, writes a full line of automobile coverage for all classifications of risk.

Old Republic International (ORI)
Yield: 5.4% | Years of Growth: 29
The company writes property and liability, mortgage guaranty, title and life, and disability insurance.

Vectren Corporation (VVC)
Yield: 5.2% | Years of Growth: 51
Vectren Corp. delivers gas and/or electricity to more than one million utility customers in Indiana and Ohio, and offers other energy related products and services.

Realty Income Corp. (O)
Yield: 5.1% | Years of Growth: 16
O is a real estate investment trust that owns a diversified portfolio of 2,339 retail properties as of Dec. 31, 2009.

The above yields aren’t nearly as eye-popping as those from the screen. You will notice the above list is heavy in REITs (interest rate risk), telecommunications (technology risk), financials (equity and interest rate risks), along with MLPs and utilities (slow growth). Ultimately, we want to determine if the yield is sustainable. If we go looking for high yield, we will find it, but it may not be what we really want.

Full Disclosure: Long CTL, UHT, NNN, T, O. See a list of all my income holdings here.

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- Stocks That Pay Monthly Dividends
- Managing Risk With Dividend Stocks

(Photo: Gravity X9)

Long considered the domain for “widows and orphans”, utilities have developed a somewhat stodgy reputation.  Why are utilities considered good for widows and orphans? Here a few reasons:

1. They are generally less volatile than the market as a whole (low beta)
2. Their products are something that people continue to need and use no matter what the economy is doing, thus
3. Their dividends tend to be more stable and secure

Utilities would be the perfect dividend income investment, except for one thing – they tend to have low dividend growth rates. As such, you wouldn’t want a whole portfolio of utilities and you need to be very selective in which utilities are added, and when they are purchased. In my personal allocation, utilities are limited to a maximum of 10% of my portfolio (currently, they make up 3.7% of my total investment portfolio).

In addition to the regular buy criteria, I look for a higher yield when buying utilities, generally greater than 5.5%, but I really prefer around 6%.  This eliminates many utilities, but there are still several from my Stock Ideas page that might be worth an additional look. Here is a list of all the utilities that have paid a dividend for more than 25 years and have a yield of 5.5% or greater:

Vectren Corp. (VVC) – 6.23% Yield
This energy holding company, headquartered in Evansville, IN, provides natural gas and electric energy to more than one million customers in Indiana and Ohio. It also offers energy related products and services to customers throughout the Midwest and Southeast. It has increased its dividend for 49 consecutive years. It last increased its dividend in November 2008.

Consolidated Edison (ED) – 6.29% yield
This electric and gas utility holding company serves parts of New York, New Jersey and Pennsylvania. With its February 2009 dividend increase, ED has now increased its dividend for the last 36 consecutive years. (most recent analysis)

Otter Tail Corp. (OTTR) – 6.35% yield
The company produces, distributes and sells electric energy in Minnesota, North Dakota and South Dakota and has interests in health services, manufacturing and other businesses. OTTR missed is normal dividend increase in February 2009. Instead, the company left its dividend flat with 2008. The last time OTTR increased its dividend was February 2008.

Integrys Energy Group (TEG) – 7.27% yield
This utility holding company serves about 485,000 regulated electric and 1,674,000 regulated gas customers. The company also operates an unregulated energy supply and services business. With its February 2009 dividend increase, TEG has now increased its dividend for the last 51 consecutive years. (most recent analysis)

Black Hills Corp. (BKH) – 7.48% yield
This diversified South Dakota-based holding company encompasses electric utility and integrated energy businesses. With its February 2009 dividend increase, BHK has now increased its dividend for the last 40 consecutive years. Prior to this last increase, the company went five quarter with no increase dating back to November 2007.

Of the five utilities listed above, I would not consider OTTR until the future dividend direction can be determined.  BKH’s late increase is a little concerning, but I could not disqualify it at this time.  I own and am currently purchasing  TEG and ED as their valuations and my allocations allow.

Finally, looking at current and some historic returns over shorter periods of time, certain utilities have done quite well. Remember, there is a reason the widows and orphans own them.

Full disclosure: Long ED, TEG