Remember when you could get a 5% yield on a CD?
Ah, those were the good old days. Today, you’d be lucky to get 5% on a relatively safe “high-yield” junk bond with a 10-year maturity, let alone something creditworthy and with a shorter duration. And yes, these days it is regrettably necessary to put quotation marks around “high-yield.”
But despite the lack of yield in the bond market, you can still find a respectably high yield among dividend stocks.
Sure, when choosing high-dividend stocks over bonds you have a little more volatility to contend with. And stock dividends — unlike bond interest — can be cut by a company’s board of directors with no warning and with no legal liability.
But if my options are to accept a “risk-free” 2% in government bonds, a risky 5% in junk bonds, or an only modestly risky 5% or more in dividend stocks, the choice is pretty clear. And when you add dividend growth into the mix, dividend stocks are a no-brainer for investors hunting for income.
Today, I’m going to highlight five solid dividend stocks with high yields of 5% or more.
I’ll start with HCP, Inc. (NYSE:HCP), a blue-chip REIT included in both the S&P 500 Index and the Dividend Aristocrats Index following its 30 consecutive years of dividend hikes. At current prices, HCP pays a very competitive 5.1%.
HCP is backed by some very attractive long-term demographic trends, most notably the aging of the Baby Boomers. At 37%, senior housing makes up the largest segment of HCP’s portfolio, followed by post-acute facilities at 31%. Life sciences, medical offices and hospitals fill out the rest of the portfolio at 14%, 13% and 5%, respectively.
HCP is by no means a sexy stock. In fact, it’s about as boring as they come. But that boring predictability is precisely what makes HCP so attractive as a dividend stock. Over the past 10 years, HCP has grown its dividend at a 4% annual clip, a rate I consider reasonable going forward.
Between the current dividend yield above 5% and the growth rate of 4%, investors in HCP can expect something in the ballpark of 9%-10% annual returns going forward. That’s not amazing … but it certainly isn’t bad in this market.
If possible, it’s a good idea to hold HCN in an IRA or Roth IRA because REIT dividends are not always taxed at the more favorable 15%-20% qualified dividend rate. In the quirky world that is REIT taxation, some of a REIT’s dividend may be considered a tax-free return of capital, but most of the dividend will be taxed as ordinary income at the investor’s highest marginal rate. So as a general rule, it’s good to hold REITs in a tax-advantaged account like an IRA or Roth IRA.
Banco Bilbao Vizcaya Argentaria SA
Next up is the first of two Spanish stocks I wanted to mention, banking giant Banco Bilbao Vizcaya Argentaria SA (ADR) (NYSE:BBVA). BBVA yields a very respectable 5.3% based on the past four payouts, and I expect BBVA’s stock price to benefit from a major revaluation of the entire Spanish market over the next several quarters.
Spanish stocks are some of the most attractively priced in the world. Spanish stocks trade at a cyclically-adjusted price/earnings ratio (“CAPE”) of just 12.7, according to Research Affiliates, giving the market as a whole an expected return in excess of 7% per year over the next decade. This compares to a CAPE of more than 27 in the United States and flat expected returns.
BBVA is attractive for several reasons. First, despite being in beaten-down Europe, it is not exclusively in Europe. Some of its biggest markets are the United States, Mexico and South America. BBVA is a global bank whose stock is treated as if it were completely dependent on Spain’s broken economy.
Secondly, after multiple rounds of stress tests and capital reviews, BBVA finally capitulated and cut its dividend a little over a year ago. With that cut out of the way — an increasingly a distant memory — I expect income investors to gravitate towards BBVA’s 5.3% yield. And finally, as I mentioned above, Spanish stocks as a whole are very inexpensive, and I expect a general revaluation of the entire market.
You’ll also want to read on for an important note about European dividends and taxation.
Much of my rationale for BBVA is solid advice for fellow Spanish large-cap Telefonica S.A. (ADR) (NYSE:TEF).
Telefonica is one of the largest telecom companies in the world, with an empire sprawling across 21 countries in Europe, Latin America and even China via its partnership with Chinese carrier China Unicom (Hong Kong) Limited (ADR) (NYSE:CHU). Telefonica’s businesses cover everything from mobile phone and internet service to paid TV.
Telecom is a brutally competitive business these days, particularly in the developed world where internet, cable TV, and mobile phone market penetration reached the saturation point years ago. But Telefonica’s strong presence in the emerging world gives it built-in growth.
As consumers continue to move from prepaid mobile plans to contract and data plans, Telefonica stands to increase its revenues per user without the heavy marketing costs associated with pulling users away from competitors.
Today, Telefonica’s biggest risks come from currency fluctuations in Brazil rather than instability in Europe. This is a problem that may get a worse before getting better, as Brazil’s political crisis stemming from the Petrobras bribery scandal shows no signs of abating. But I believe most of the bad news was priced in a long time ago.
Like BBVA, Telefonica found it necessary to cut its dividend due to fallout from the Eurozone debt crisis. In fact, in 2012 Telefonica slashed its dividend to zero. But after the market stabilized, Telefonica reinstated its dividend and hasn’t looked back since.
At today’s prices, Telefonica yields a very respectable 6.2%.
Next up, we have another solid European stock pick, French energy major Total SA (ADR) (NYSE:TOT).
Energy stocks as a sector have gotten absolutely pounded over the past nine months due to the falling price of crude oil, and Total is no exception. Compounding the problem for U.S. investors is the fact that Total is a European company whose shares are priced in depreciating euros.
Still, if you believe as I do that both the crude oil decline and the euro decline have mostly run their course for now, then the European oil majors are an intriguing value proposition. At current prices, Total sports a very impressive 5.9% dividend yield. Total has also been steadily increasing its dividend over the past three years.
Interestingly, in a bid to become more shareholder friendly, in 2011 Total moved away from the European norm of paying dividends semiannually to the American norm of paying quarterly. While this may seem minor, I applaud any attempt by management to be more responsive to shareholder needs.
Finally, we have Norwegian oil major Statoil ASA(ADR) (NYSE:STO), a company that has really emerged in recent years as a shareholder-friendly dividend payer.
Statoil is an International Dividend Achiever, meaning that it has raised its dividend for a minimum of five consecutive years. Indeed, Statoil has raised its dividend for six years running and currently sports a yield of 5.4%.
Statoil, which is majority owned by the Norwegian government, is best known for its role in bringing North Sea oil to market. But as the North Sea fields have matured, Statoil has aggressively expanded internationally and now has operations in 36 countries. And Statoil is continuing to invest in Russia, even amidst international sanctions.
Statoil’s production costs are a little higher than some of the larger oil majors, and with crude prices under $90 per barrel, the company has to borrow to sustain its dividend and capital expenditures, according to Norway-based Sparebank.
Yet management has repeatedly reiterated its commitment to its dividend and has indicated that it would sacrifice capital spending on growth projects if that is what was needed to preserve the dividend. And Statoil’s manageable debt load allows it the flexibility to borrow if crude prices stay depressed for longer than expected.
Statoil’s dividend has to be considered a little riskier than the others I’ve covered here, but I still consider it safe enough to warrant investment.
Now, you’re actually better off holding the European shares in a taxable brokerage account rather than an IRA if possible. That’s because most European countries withhold taxes on dividends paid to U.S. investors. For example, BBVA and Telefonica are subject to a 21% Spanish withholding tax, and Total is subject to a 30% French withholding tax. Statoil is subject to a lower 15% Norwegian withholding tax.
But while these taxes are a major irritant, all is not lost. You can recoup a lot of the foreign taxes paid via the Foreign Tax Credit. The math here is a little complicated, but I’ll try to keep it simple. The credit is equal to whatever you would have paid in the U.S. So, if you would have paid 15% on a U.S. stock, you can get a credit for 15% paid to a foreign country. Using France as an example, you’d recoup half of the 30% dividend tax withheld in France. But to take advantage of this, the shares have to be held in a taxable account.