Finding income can be difficult in a market where the average yield for the S&P 500 is just 1.9%. Just as hard is finding stocks trading with a valuation below the market index price-earnings ratio of 22. We will look at three stocks with above 4% yields, have at least a decade of dividend growth and a price-earnings ratio below the S&P 500. Investors looking to reap the rewards of owning these dividend-paying stocks need to own shares by the ex-dividend date, which happens to be June 19 for all three names below.
Broadcom
- Dividend payment date: June 30
- Current yield: 4.3%
- 10-year average yield: 2.1%
- Years of dividend growth: 10
Broadcom Inc. (AVGO, Financial) is a global leader and supplier of semiconductors. The company designs, develops and supplies products such as radio frequency amplifiers, filters and front-end modules. The company’s end markets include wireless communications, industrial and automotive. Broadcom has a market capitalization of $121 billion today.
Broadcom raised its dividend 22.6% for the payment made this past Dec. 30. The company’s dividend growth has really exploded in recent years. For example, Broadcom distributed $10.60 of dividends per share in 2019, a 51% increase from the prior year. The company’s dividend has grown at a rate of 46% since 2010. The stock has an average yield of 2.1% over the last decade, so the current yield is more than double its historical average.
Following the most recent increase, the company has an annualized dividend of $13. The analyst community expects Broadcom will produce $21.46 of earnings per share in fiscal 2020 (year ends Oct. 31). This gives the stock a payout ratio of 61%, which compares unfavorably to the stock’s historical average payout ratio of 28%. The projected payout ratio would be the stock’s highest ratio since it began paying a dividend. Broadcom’s earnings per share over the last 10 years has grown at a high rate, but not at the same level as the dividend. I don’t expect a dividend cut, but do expect dividend growth to slow in the coming years. The stock’s current yield is 4.3%.
Broadcom trades at around $303 at the time of writing. Using the expected earnings per share for the year, shares have a forward price-earnings ratio of 14.1. The stock has averaged a price-earnings ratio of 13.3 since 2010.
The company’s leadership position in the area of semiconductors makes it an attractive stock to own. Shares are slightly overvalued to its historical average, but not unreasonably so. And Broadcom’s dividend should be extremely attractive to income investors. For context, only twice in the last 10 years has Broadcom offered a yield above 3% (2018 and 2019). I rate shares as a buy.
Federal Realty
- Dividend payment date: July 15
- Current yield: 4.6%
- 10-year average yield: 3.0%
- Years of dividend growth: 52
Federal Realty Investment Trust (FRT, Financial) owns, manages and develops real estate properties for retail and mixed-use purposes. The trust tends to focus on higher income and the more densely populated regions of the U.S. It isn’t surprising then that Federal Realty’s properties are mostly located in the Northeast and Mid-Atlantic regions of the U.S. as well California. The trust is valued at $6.8 billion.
Federal Realty raised its dividend 2.9% for the payment made this past Oct. 15. The trust has compounded its dividend with an annual growth rate of 4.7% since 2010. Federal Realty has raised its dividend for 52 consecutive years. In addition to growing its dividend through the past six recessions, Federal Realty is a Dividend King. Dividend Kings are those stocks with at least five decades of dividend growth. The trust is also the lone REIT to qualify as such. There are less than 30 Dividend Kings today, magnifying how impressive this feat is for Federal Realty. The stock’s current yield is 160 basis points above its 10-year average yield.
With an annualized dividend of $4.20 and expected funds from operations of $5.67, Federal Realty has a payout ratio of 74%. This is slightly above the 10-year average payout ratio of 68%. REITs often have a high payout ratio and though Federal Realty’s projected ratio is above its long-term average, I believe that the dividend is very safe. With over five decades of dividend growth, Federal Realty has proven that it has been able to manage its dividend in a very conservative manner.
Federal Realty trades close to $90 at the moment. Using expected FFO for the year, the stock has a price-to-FFO ratio of 15.9. This makes shares appear undervalued compared to the average price-to-FFO of 23.4 that the stock has traded with since 2010. For context, there are only two years over the last decade where Federal Realty averaged a multiple below 20 (2010 and 2018).
The company’s ability to raise its dividend every year for 52 years is a testament to its ability to grow its business while rewarding shareholders. The stock’s current yield is much higher than its average and shares look undervalued when comparing the current valuation to the long-term average. Therefore, Federal Realty looks like a buy.
Philip Morris International
- Dividend payment date: July 10
- Current yield: 6.5%
- 10-year average yield: 4.5%
- Years of dividend growth: 12
Philip Morris International Inc. (PM, Financial) was spun off from Altria (MO, Financial) in 2008. The company manufactures, sells and distributes tobacco products, such as Marlboro and Parliament, in countries outside of the U.S. Philip Morris trades with a market capitalization of $112 billion today.
Philip Morris raised its dividend 2.6% for the Oct. 11 payment. This is well below the annual growth rate of 6.6% that the stock has had over the last decade. Still, Philip Morris has increased its dividend every year that it has been separated from its sister company. If the stock were to average its current yield of 6.5% for all of 2020, then this would be the highest average dividend yield since 2010. And in only two of those years was the average yield above 5% (2018 and 2019).
The annualized dividend of $4.68 would account for 96% of expected earnings per share of $4.89. Philip Morris has averaged a 78% payout ratio since 2010, but almost 90% since 2015. With all of its sales outside of the U.S., results for the New York-based Philip Morris will always be subject to fluctuations in currency exchange rates. This has been a headwind to results in recent years, which is why the payout ratio is extremely high. The company likely offered a below-average dividend increase last fall because of its high payout ratio. Investors will want to monitor this situation going forward.
Based off the current share price of $72 and expected earnings per share, Philip Morris has a price-earnings ratio of 14.7. The stock has a 10-year average multiple of 17.5 earnings.
Based on dividend yield and valuation, Philip Morris looks like a solid investment. The current yield is above the stock’s long-term average and is more than three times that of the S&P 500. The price-earnings ratio is below its 10-year average. The dividend payout ratio is high, but income investors with more appetite for risk and those who don’t mind owning tobacco companies might do well buying Philip Morris at the current price.
Final thoughts
Broadcom, Federal Realty and Philip Morris all currently offer a dividend yield in excess of 4%. All of have least a decade of dividend growth, with Federal Realty’s 52 years of dividend growth leading the way. For these reasons, these names should attract income-focused investors.
Each stock also has a current price-earnings ratio in the mid-teens, with Federal Realty and Philip Morris cheaper than their respective 10-year average valuations.
Investors looking for income and value should consider adding these stocks to their portfolio.
Disclosure: The author does not have a position in any of the stocks mentioned in this article.
Read more here:
- This Trio of Companies Just Raised Dividends​
- UPS Is Undervalued Based on Its Above-Average Yield
- Three Stocks With a High Yield and Low Valuation
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
