When the Government Forces You Into Dividends, The Great Dividend Portfolio (MO, AEP, AWK, T, DLR, GE, GOV, KMB, KMP, SNH, WMT)

What on earth are investors supposed to do when T-Bonds offer almost zero income?  Interest rates are now so low that the price-risk in long-term Treasury bonds is too great.  Ben Bernanke has now quantified that low (or almost no) interest rates are here to stay for at least another two years.  Bernanke and the Federal Reserve are forcing income-oriented investors out of Treasuries to find income elsewhere.  Some investors will choose more risky bonds and convertible issues, but the time is right for some of the higher dividend stocks that also offer some degree of implied price safety.

24/7 Wall St. tracks a myriad of dividend stocks, and we have looked through the price performance, compared them to peers, and done a valuation dive to determine which are the safest of the high-yield stocks out there today.  Our list of high-yield dividend winners includes the following: Altria Group Inc. (NYSE: MO); American Electric Power Co., Inc. (NYSE: AEP); American Water Works Company, Inc. (NYSE: AWK); AT&T, Inc. (NYSE: T); Digital Realty Trust Inc. (NYSE: DLR); Enterprise Products Partners LP (NYSE: EPD) or Kinder Morgan Energy Partners LP (NYSE: KMP); General Electric Co. (NYSE: GE); Government Properties Income Trust (NYSE: GOV); Kimberly-Clark Corporation (NYSE: KMB); Senior Housing Properties Trust (NYSE: SNH); and Wal-Mart Stores Inc. (NYSE: WMT).

If you use the average yield of this basket it actually comes to about 5.5%.  That is a phenomenal portfolio yield considering that the yield of the 10-Year Treasury auction just went off at 2.14%.  Chasing yields is a tricky game because not all dividends are alike and not all dividends are safe.

Our aim is to find dividends which are not only considered to be safe.  We think every one of these businesses can grow their dividends through time and some of these companies even classify as “value stocks” that investors seek when looking for havens in rough markets.

Altria Group Inc. (NYSE: MO) recently closed at $24.53 and its 52-week trading range is $22.15 to $28.13.  Its market cap is $50.4 billion and the shares trade at 11.2 times forward earnings.  The company’s return on equity is 74.4% and the latest dividend yield was 6.2%. With Obama and Boehner both being smokers, maybe this ultimate continued-surprise winner is truly immune from Washington D.C.  The state penalty issues have mostly been resolved, with a few exceptions.  Also in the favor of Altria is that juries seem to no longer award cases for smokers “who got duped into smoking and were told smoking didn’t kill you” in the case.  Altria carries almost no currency risk for its core tobacco business.  It also holds a stake in SAB/Miller.  That dividend has never wavered.

American Electric Power Co., Inc. (NYSE: AEP) recently closed at $34.27 and its 52-week trading range is $33.09 to $38.99.  Its market cap is $16.5 billion and the shares trade at 10.6 times forward earnings.  The company’s return on equity is 9.0% and the latest dividend yield was 5.4%.  Low interest rates work hugely in the favor of power companies.  AEP has a blend of power sources for its client base, it covers millions of Americans in many states, and is now cheap compared to the market and cheap against many peers.  AEP is due soon for yet another dividend hike and this company is very proactive when it comes to protecting the dividend.

American Water Works Company, Inc. (NYSE: AWK) recently closed at $26.82 and its 52-week trading range is $21.72 to $30.70.  Its market cap is $4.7 billion and the shares trade at 14.5 times forward earnings.  The company’s return on equity is 7.0% and the latest dividend yield was 3.6%.  This is the best water stock out there and it is extremely rare that this water utility is off by more than 10% from highs.  The company has said that it can keep raising its dividend and it seems to be unstoppable.  As a utility, it benefits greatly when interest rates are so low as it can borrow on the cheap and has the franchise to lock in low-rate borrowing for the long-term.

AT&T, Inc. (NYSE: T) recently closed at $27.88 and its 52-week trading range is $26.20 to $31.94.  Its market cap is $165 billion and the shares trade at 10.9 times forward earnings.  The company’s return on equity is 18.3% and the latest dividend yield was 6.2%.  Being the first to carry the iPhone was a win for AT&T and the defections were not as high as many expected when Verizon Communications Inc. (NYSE: VZ) began carrying the iPhone.  The one issue that may concern investors is the break-up penalty that will have to be paid if regulators do not clear the acquisition of T-Mobile, but AT&T’s $165 billion market cap is huge versus a potential $3 billion penalty.  As a large borrower, similar to utilities, AT&T benefits greatly from having such a low interest rate environment.

Digital Realty Trust Inc. (NYSE: DLR) recently closed at $54.19 and its 52-week trading range is $47.42 to $64.25.  Its market cap is $5.2 billion and the shares trade at 12.2 times forward earnings.  The company’s return on equity is 6.6% and the latest dividend yield was 5.0%.  Investors sit around and analyze technology stocks for their ability to pay dividends over and over.  Rather than taking on the risk of a single entity or even a single sub-sector in technology, consider “Technology’s Landlord” via this REIT.  This company has multiple clients and has many datacenters that it derives its income from.  Its borrowing costs are cheaper than ever now and there just are no 5% yields in technology.

General Electric Co. (NYSE: GE) recently closed at $15.09 and its 52-week trading range is $14.25 to $21.65.  Its market cap is $160 billion and the shares trade at 9.2 times forward earnings.  The company’s return on equity is 11.6% and the latest dividend yield was 3.9%.  GE has been continuing to turn its ship around and the pullback of more than 25% has given investors the entry point that the yield is strong enough with a huge opportunity for price appreciation when the dust settles in this market.  The company looks less and less like a bank stock compared to its past each quarter and it keeps having its customer credit metrics improve.  GE is soon to pay back Warren Buffett for that 10% preferred stake from the recession and the company has the ability to buy back stock and to gradually increase its dividend through time.  The company’s portfolio is also said to be the best portfolio ever according to management.

Government Properties Income Trust (NYSE: GOV) recently closed at $21.23 and its 52-week trading range is $20.53 to $28.28.  Its market cap is $998 million and the shares trade at 10.5 times forward earnings.  The company’s return on equity is 5.3% and the latest dividend yield was 8.1%.  REITs tend to do better in low-rate environments.  Now that the government’s debt-ceiling woes have been resolved, the trust is not facing as high of risks that its federal and local government clients will suddenly not be able to pay their office and property rents.  The government’s interest rates for investors are too low to consider, but being the landlord of the government apparently offers a hell of a yield.  The price pullback is yet another attractive consideration now that will leave large capital appreciation opportunities when the market stabilizes.

Kimberly-Clark Corporation (NYSE: KMB) recently closed at $62.57 and its 52-week trading range is $61.00 to $68.49.  Its market cap is $24.5 billion and the shares trade at 11.9 times forward earnings.  The company’s return on equity is 32.5% and the latest dividend yield was 4.5%. This is the highest yielding consumer products company and the drop in many input prices is likely to help the company’s future margins.  This is a global player so there is currency risk, and the sector is still in the midst of dealing with in-store promotion costs.  Our take is that the pullback here offers price appreciation when the dust settles and we see continued earnings power.  The company’s shareholder-friendly stance has become the envy of the sector and this one is not a mega-cap market value stock that just requires too much money to drive the shares up.

Kinder Morgan Energy Partners LP (NYSE: KMP) is in the attractive and somewhat misunderstood MLP sector, so technically the “dividend” is often treated as a return of capital.  With shares around $69.00, its market cap is almost $23 billion and the 52-week trading range is $63.42 to $78.00.  The yield-equivalent here is about 6.6% and the payout keeps rising.  What makes MLPs so attractive is the tax treatment and the opportunities that lay ahead of the sector.  Kinder Morgan entities have seen a pullback of late, but anything under Richard Kinder’s watch has made many millionaires (and some billionaires) over the years.  This is one of the top MLP plays out there and its shares rose on Wednesday when equities were down so much.  If investors are being forced to chase yields now, having a solid oil or gas MLP in the mix is a must for long-term investors.  Another great alternative in MLPs is Enterprise Product Partners LP (NYSE: EPD).

Senior Housing Properties Trust (NYSE: SNH) recently closed at $20.40 and its 52-week trading range is $19.09 to $25.28.  Its market cap is $3.1 billion and the shares trade at 10.7 times forward earnings.  The company’s return on equity is 7.3% and the latest dividend yield was 7.8%.  The most recent changes in Medicare and Medicaid reimbursement rates did not punish this “retirement center” REIT as bad as some other players in healthcare and senior care.  That situation may have changed the sector, but Senior Housing Properties runs itself in a manner that is at least somewhat buffered from a challenging environment.  The REIT has also been able to grow its dividend though time and we expect that to continue here.

Wal-Mart Stores Inc. (NYSE: WMT) recently closed at $48.41 and its 52-week trading range is $48.31 to $57.90.  Its market cap is $168 billion and the shares trade at 9.9 times forward earnings.  The company’s return on equity is 23.4% and the latest dividend yield was 3.0%.  Wal-Mart has really come off the highs and the sell-off has been enough that investors are getting to buy Wal-Mart when it is in the bottom one-third of a very long-term trading band that has been a winning trade over and over and over.  This is still about dividends though.  What Wal-Mart offers is perhaps the greatest dividend of all retailers and that is not going to change.  In fact, Wal-Mart’s dividend is high enough that you could even argue that it is pressuring other retail competitors to spend more of their retained earnings on dividends rather than on new stores.  Wal-Mart may seem like a lost company, but its value is there, it is going to be here for the long haul, it is supposed to get more customers in tougher times, and the stock is valued very attractively.

As you know by now, dividend investing is just one mean to an end.  When the government offers no reward for Treasury yields, the market and the powers that be are forcing investors into other dividend and income alternatives.  The trick is to find companies and sectors that will thrive with earnings through good times and hard times and which also actually benefit from a low-rate environment.

When the 10-Year Treasury pays a whopping 2.14% before taxes, a 5.5% portfolio basket does not sound bad.  Not bad at all.

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JON C. OGG