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Nathan Parsh
Nathan Parsh
Articles (192) 

4 High-Yield Stocks to Ring in the New Year

We recently purchased these stocks that feature high yields and valuation at or below their long-term averages

Due to gains made over the past few years and our focus on building up our lower-yielding positions, the yield on the portfolio my wife and I are building fell to just over 2% last year. One of the goals that I listed for our portfolio in 2021 was to increase the average yield of our holdings. Another goal is to purchase stocks trading at or below their long-term valuations.

To that end, we added to our positions in four stocks that yield above 4% on Monday. In addition, all of the names purchased were trading below their long-term historical average valuations. They were also near or below their GF Value at the time of purchase, further indicating value opportunities.

AbbVie, Inc.

Our first purchase was AbbVie, Inc. (NYSE:ABBV) at $104.68. AbbVie has only been an independent company since early 2013 when it was spun off from parent company Abbott Laboratories (NYSE:ABT). AbbVie is one of the largest pharmaceutical companies in the world with a market capitalization approaching $187 billion. The company had revenues in excess of $39 billion over the last four quarters.

AbbVie has done an excellent job of growing revenues since becoming a standalone company. Sales have increased with a compound annual growth rate of 8.5% from 2013 through 2019. The company has done an even better job growing its bottom-line as profits have increased 14.8% over that same period of time. Much of this can be attributed to net profits growing from 27% in 2013 to 40.1% in 2019. Earnings per share has improved by more than 14% over the last seven years.

This growth has allowed the company to aggressively raise its dividend. The dividend has compounded at a rate of almost 16% per year over the last half-decade. Shareholders received $4.72 of dividends per share in 2020, which was a 10.3% increase from the prior year.

AbbVie is expected to earn $10.48 per share in 2020 according to analysts surveyed by Yahoo Finance, which results in a payout ratio of 45% using last year's dividend total. This is almost in-line with the stock's five-year average payout ratio of 47%.

The company continued its streak of double-digit increases by announcing a 10.2% raise for the upcoming Feb. 16 payment. This gives AbbVie nine years of dividend growth. With a new annualized dividend of $5.20, AbbVie offers a yield of 4.9% currently. This compares very favorably to the stock's average yield of 3.8% since 2013.

At our purchase price, shares of the company traded with a forward price-earnings ratio of 10. This is below the stock's five-year average price-earnings ratio of 12.3. Our purchase of AbbVie was just about at the stock's GF Value as well:

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The GF Value of $104.03 for AbbVie gives our purchase a price-to-GF Value ratio of just over 1.00. This means that AbbVie is fairly valued according to GuruFocus.

I discussed why I like the company so much in a previous article, and those reasons largely remain the same. AbbVie is best known for its blockbuster drug Humira, though the company does have several other promising drugs in their infancy. The company also has an excellent dividend growth track record, both since the spinoff and dating back to its days as part of Abbott Laboratories. Shares trade at their GF Value, but lower than their historical average. This combined with a recent double-digit dividend increase made AbbVie an appealing investment choice to start 2021.

AT&T Inc.

Next, we added to AT&T Inc. (NYSE:T) at $29.28. AT&T is one of the largest telecommunication companies in the U.S. In addition to its wireline and wireless businesses, the company's other businesses include WarnerMedia, DirecTV and AT&T Latin America. AT&T has a market capitalization of $209 billion. The company has sales of almost $173 billion over the last four quarters.

Shares of AT&T have not been a good investment recently. The stock is down almost 25% over the last year and has lost more than 12% over the last five years. This compares poorly to the returns of the S&P 500 over this period of time.

Over the last decade, sales have increased with a CAGR of 3.8% while net profit improved 6.8%. Net profit margin has only improved 30 basis points to 9.1% during this time, but the increase in top-line numbers has led to the higher profit growth. Even with more than 1.3 billion shares added to the share count over the last decade, AT&T has increased EPS at a rate of 4.6% per year.

AT&T normally increases its dividend for the first payment of the year, but did not do so for the upcoming Feb. 1 distribution. An increase anytime in 2021 would allow the company to maintain its 36-year dividend growth streak. On the plus side, AT&T currently yields a very generous 7.1% compared to its 10-year average yield of 5.5%.

While share price growth has been disappointing, AT&T's dividend growth streak of 36 years shows that the company has managed to increase its dividend through several different economic cycles. Shareholders have normally received a raise of a penny per share per quarter since 2009. Shareholders received dividends per share of $2.08 last year, which was an increase of just 1.9% from the previous year and matches the stock's 10-year average growth rate.

With expected EPS of $3.15 for the full year, AT&T has a projected payout ratio of 66%. This is below the long-term average payout ratio of 69% and at the low end of the stock's 10-year payout range. Leadership has stated that that they aim to have a payout ratio in the mid-50% range.

Using our purchase price and expected EPS for the year, shares have a forward price-earnings ratio of 9.3. This compares favorably to the stock's 10-year average valuation of 12.6 times earnings. The stock is also trading below its GF Value:

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With a GF Value of $30.34, our purchase price for AT&T has a price-to-GF Value ratio of 0.97. This earns AT&T a rating of fairly valued according to GuruFocus. Reaching its GF Value would result in a 3.6% gain. Add in the dividend yield at the GF Value, which would be 6.9%, and total returns for AT&T could reach 10.4%.

AT&T has been a poor investment over several periods of time. That said, we believe the company's addition of Time Warner has provided another avenue for growth. AT&T's HBO Max streaming service is already seeing high adoption rates, with nearly 13 million members as of early December. The company also has an extremely long dividend growth track record and pays a high yield that looks very safe. In addition, even a slight increase in share price could lead to double-digit total returns. Not bad for a stock we own primarily for its dividend yield.

The Toronto-Dominion Bank

With our next purchase we added to the Toronto-Dominion Bank (NYSE:TD) at $56.29. Toronto-Dominion is one of the largest banks in Canada. The bank has been in business for more than 165 years and currently serves more than 26 million customers in Canada, the U.S. and around the globe. Toronto-Dominion has a market capitalization of $104 billion and generated sales of almost $30 billion in fiscal 2020 (the bank's fiscal year ends Oct. 31).

In U.S. dollars, Toronto-Dominion has increased its EPS at a rate of just 2.1% year-over-year. The exchange rate between the two currencies reduces results slightly. Had the bank matched EPS estimates for the year prior to the pandemic, then growth over the last decade could have been nearly 5%.

One reason we purchased Toronto-Dominion late last year was that the bank, along with the other Canadian banks, paused but did not cut its dividend during the last recession, unlike its peers in the U.S.. The bank has increased its dividend for nine consecutive years and has raised its payments with a CAGR of 5.8% over the last decade.

Toronto-Dominion distributed $2.31 of dividends per share in fiscal 2020, which was a 6.5% increase from the previous year. Using the current annualized dividend, shares offer a yield of 4.1% at the moment. The stock has averaged a yield of 3.7% since 2010.

The bank is expected to earn $4.56 per share in fiscal 2021 according to analysts. Using the current annualized dividend, the payout ratio is 51%. This is slightly higher than the 10-year average payout ratio of 44%, but not anywhere near what could be considered a dangerous level.

Based off of purchase price and expected EPS for the new fiscal year, the stock has a forward price-earnings ratio of 12.3. This is just above the 10-year average price-earnings ratio of 12.1. While the stock is trading with a small premium to its historical valuation, Toronto-Dominion appears undervalued compared to its GF Value:

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Toronto-Dominion has a GF Value of $61.90. Based off of our purchase price, the stock has a price-to-GF Value ratio of 0.91, earning Toronto-Dominion a rating of fairly valued. We would see a return of 10% from our purchase price if shares traded with their GF Value. The dividend yield would be 3.7% at the GF Value, giving us a total return of almost 14% from where we added to our position.

Toronto-Dominion showed during the last recession that its dividend could sustain a very challenging time for the financial sector. The bank has raised its dividend every year since and offers a much higher than usual yield today. Shares offered a solid potential return that made buying Toronto-Dominion too hard to pass up.

Verizon Communications Inc.

Finally, we added to Verizon Communications Inc. (NYSE:VZ) at $56.65. Verizon is a diversified telecommunications company whose network covers nearly 300 million people in the U.S. The company provides services to almost 100 million customers. Verizon has a market capitalization of $242 billion and revenue totaled $128 billion over the last year.

As with AT&T, Verizon has been a slow grower over the last decade, at least on the top line. Revenue has increased with a CAGR of a little over 2% over the last decade. Where Verizon really stands out is on the bottom-line as net profit has grown at a rate above 12%. Higher revenues have played a role in this growth, but net profit margin was the real star as this metric went from 5.9% in 2010 to 15.1% last year. The company's share count is up significantly over the last 10 years, but EPS is still up 8% annually during this period of time.

Verizon has a solid dividend growth history, with the company raising distributions for the past 16 years. Growth isn't much better than its largest peer as the dividend has compounded at a rate of 2.2% since 2010. Shareholders received $2.47 in dividends in 2020, 2% higher than the previous year.

Analysts expect the company to earn $4.85 in 2020, which results in an expected payout ratio of 51% for the year. This is considerably better than the 10-year average payout ratio of 66%.

The company last raised its dividend for the Nov. 2 payment, which was an increase of 2% from the prior year. Verizon's annualized dividend of $2.51 gives the stock a current yield of 4.3%, which is lower than its 10-year average yield of 4.8%.

At our purchase price, we were able to acquire shares of Verizon at a forward price-earnings ratio of 11.7. This is a discount to the price-earnings ratio of 13.7 that shares have averaged since 2010. Verizon is trading above its GF Value:

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Verizon has a GF Value of $55.48, resulting in a price-to-GF Value ratio of 1.02 for our most recent purchase of the stock.

As with AT&T, we own Verizon primarily for the income it produces and the relative safety of its business during downturns in the economy. The company offers products and services that consumers would likely continue to use even in a recession. With the stock trading below its long-term average valuation, adding Verizon was a fairly easy decision to make.

Final thoughts

In keeping with our goals for 2021, we added to four positions offering a high yield and were trading at or below their respective long-term valuations. AbbVie, AT&T, Toronto-Dominion and Verizon checked these boxes for us and we were happy to add to our positions in each company.

Author disclosure: the author maintains a long position in Abbott Laboratories, AbbVie, AT&T, Toronto-Dominion and Verizon

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About the author:

Nathan Parsh
I am originally from the Detroit, Michigan area, before moving to Maryland to begin a career as an educator. This is my 15th year teaching. My wife and I have two young children who keep us on our toes.

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