| High-Yield
Stocks That Will Help You Sleep Well at Night |
Published: February 2, 2005
Nervous markets are good for
income investors. As stocks turn skittish, smart money rotates into
safe, steady dividend-paying stocks. These stocks can usually be counted
on to deliver healthy returns no matter whether the markets are moving
up or down.
We have spent the past few
weeks sifting through various sectors of the economy where smart money
appears to be turning its attention. In the end, we uncovered three such
sectors -- consumer staples, utilities, and healthcare-related real
estate -- that we feel are poised to outperform the broader market
throughout the coming year. All of them comprise quality stocks that
offer above-average dividend yields.
While the benchmark S&P 500
Index has declined about -4% since the start of the year, the consumer
staples index (^IXR) has remained stable, the utilities index (^UTIL)
has gained nearly +1%, and the healthcare provider index (^RXH) has also
held its ground.
Here's a brief low-down on
what's driving the growth of each of these stable sectors:
Consumer Staples --
Within the consumer staples group, companies that make, package, and
sell food are high on the list of stocks with growth potential. Stocks
in the packaged foods industry advanced an average of +14% last year
versus just a +9% increase for the S&P 500. The industry is expected
to post +7% earnings growth this year thanks to increased demand and
more efficient production systems. The longer-term prospects are equally
strong, as the industry is poised to capitalize on rising worldwide
demand for healthy, easy-to-prepare packaged foods.
Utilities -- The utility
sector has beaten the benchmark S&P 500 for two years running and is
poised to continue doing so in the future. Earnings are forecast to grow
at a rapid +14% clip this year, about five percentage points higher than
the S&P 500's projected growth rate. Higher demand from a continued
economic recovery together with improved cost controls are expected to
drive growth. The industry should also benefit from a flexible timetable
for emissions cuts thanks to the pro-energy Bush administration.
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Healthcare Real Estate
-- Real estate investment trusts, or REITs, have pulled back recently on
fears over rising interest rates. Higher rates tend to reduce demand for
property, lowering the value of real estate holdings. In addition, since
most REITs are highly leveraged (carry large debt loads), their debt
servicing costs also tend to increase as interest rates rise, hurting
their bottom lines. However, all REITs are not equally affected by
higher rates, and healthcare REITs in particular are likely to show
continued growth in the year ahead. This corner of the real estate
industry is expected to see earnings grow by about +7% this year,
boosted in part by rising government healthcare reimbursement rates.
Longer term, healthcare REITs should be among the fastest growing
property types thanks to the aging U.S. population. The number of
Americans over the age of 65 is expected to double over the course of
the next 15 years.
Odds-On Favorites
Finding sectors is one thing, but identifying winning stocks within
those sectors is quite another. The problem is that not all stocks offer
the same margin of safety or reward potential. In an effort to identify
the top-performing stock in each sector, we scoured the investment
universe in search of stocks with strong growth outlooks and high
dividend yields that still had room to move higher.
Each of the stocks featured
below should deliver earnings growth of at least +8% in the coming year
and also carries a rich dividend yield of 3.7% to 6.6%. Better yet,
despite their recent run up, all three companies are still reasonably
priced and, in fact, are trading at a discount to their peers. This
month's top picks are...
Important
Note: To view the remainder of this
article, in which Carla Pasternak provides an in-depth analysis of her
favorite stocks from the three sectors outlined above, you'll need to
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Please Note: The above article was merely a
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Investing. In each issue Carla Pasternak presents
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