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Dividends stocks in the tech space were the new breed of dividends for the last decade.
There was a time that Microsoft (NASDAQ: MSFT) paid a 1.5% dividend yield and traded at $20 a share. It now pays 2.7% and is over $45 a share. Its total return (including dividends and stock price appreciation) over that period was an annualized 14%.
But finding the next breed of dividends is not easy in the current environment. Master limited partnerships (MLPs) and real estate investment trusts (REITs) are getting all the attention.
I’m victim to this as well; because, who doesn’t like getting a 5% plus yield when the average S&P 500 dividend yield is less than 2%.
Yet, investing in dividend stocks when they are overlooked can be a great way to get in at a very attractive price. That’s why I think the new breed of dividends could be the losers of the financial crisis.
Some of the stocks that investors were selling by the boatloads in 2009 have risen from the ashes — stronger than before and offering a steady dividend to boot.
Investors overlook these stocks for a couple reasons. One is that the yields aren’t all that high right now; and two, there’s a recency bias. Certain industries were hit especially hard by the crisis and this has skewed investors’ perception of big banks and the likes.
Along those lines, I’ve found three dividend opportunities created by the financial crisis. Without further ado, here they are:
New Breed Of Dividends No. 1: U.S. Autos
The auto sector was hit hard by the financial crisis, no doubt there. Consider the fact that General Motors (NYSE: GM) filed for bankruptcy and was ultimately bailed out by the U.S. government. And shares of Ford (NYSE: F) went from trading at an all-time high of $35 share to trading below $1.50.
All that aside, these two U.S. automakers are back to generating several billion dollars in earnings. In terms of dividends, General Motors offers a 3.4% dividend yield and Ford is paying an impressive 4% yield. And their payout ratios are between 45% and 55%.
What’s more is that both are attractively priced, trading at price-to-earnings ratios of less than 10x (based on next year’s earnings estimates). And the future is fairly bright; both auto companies are expected to grow earnings by over 45% next year. That means dividends should move higher as well.
But beyond just next year, these guys will be solid investments as prosperity climbs in emerging markets. That means consumers will have more money to spend on cars. Also, Europe has been a troubled market for both automakers, but it has been showing improvement in terms of auto sales.
New Breed Of Dividends No. 2: Big Banks
Big banks were at the forefront of the housing crisis and subsequent recession, being blamed for shady lending practices that led to unnecessary risks.
And as a result, the stock prices of many banks still haven’t recovered from pre-financial-crisis levels. Recall that the largest financial sector ETF, the Select Sector Financial SPDR ETF (NYSEArca: XLF), lost 85% of its market value in less than two years from 2007 to 2009.
In any case, the big banks have been rebuilding their reputations. Part of that is gaining shareholder trust by way of dividends. The top dividend payers in the big bank space are Wells Fargo (NYSE: WFC), with a 2.7% yield, and JPMorgan Chase (NYSE: JPM), which offers a 2.9% yield.
Wells Fargo has one of the highest returns on equity among major banks, coming in at 9%. The beauty of Wells Fargo is that it’ll be a benefactor of rising rates — more so than its peers. It has a large base of deposits and investment related securities, which means more interest income when rates do rise.
As far as JPMorgan, it’s the largest U.S. bank by assets, with over $2.5 trillion in assets. And it trades at less than book value. JPMorgan has been spending several billions of dollars in legal costs, but that appears to have peaked in 2013. So the legal issues are less pronounced and as the legislation costs roll off, that’ll free up cash for dividends.
New Dividend Breed No. 3: Homebuilding
Another major victim of the housing crisis was the homebuilding industry. By the time the iShares U.S. Home Construction ETF (NYSEArca: ITB) had found a bottom in 2009, it had lost nearly 90% of its market value.
One of the underrated players in the industry, which has exposure to the homebuilding and remodeling market, is Home Depot (NYSE: HD). It pays a 1.8% dividend yield, which is just a 40% payout of earnings.
Home Depot trades at a price-to-earnings ratio of 24, which seems high, but it is a discount to chief peer, Lowe’s (NYSE: LOW). In fact, the valuation discount on Home Depot shares (relative to Lowe’s) is the largest we’ve seen in more than three years. But Home Depot’s dividend yield is higher, and its return on invested capital of 22% is nearly double of Lowe’s.
Home Depot will be a benefactor of the continued rebound in homebuilding, as well as the aging of homes in the U.S. As homes get older, they need for repairs and remodeling. With that, Home Depot is expected to grow earnings by 25% this year. Look for more dividends on the horizon.
In terms of dividends among homebuilders, PulteGroup (NYSE: PHM) is the best bet. It stopped paying a dividend toward the end of 2009, but reinstated its dividend in mid-2013. It’s now offering one of the highest yields in the homebuilding space — coming in at 1.5%.
PulteGroup has a diversified business model, catering to various housing markets, including first-time home buyers and those looking to move up. But its key catalyst is the exposure to the aging population via its Del Webb living communities. As the wave of baby boomers continue to age, the demand for active adult communities will rise — that’s where Del Webb comes in.
In closing: For this low-yield environment, with investors gobbling up the REITs and MLPs, it pays to look where others aren’t. Don’t be afraid of “low” dividend yields, as investing in young dividends is a great way gain income without sacrificing stock price growth. It’s only a matter of time before investors realize that the auto companies, banks and housing companies of today are very different from what we saw five years ago.
Six times BIGGER Dividends – with this one stock
The average yield of the Dow has sunk to 2.1%. That’s just sad. However, we know of one group of investors collecting up to $550 every 30 days… from a little-known investment that yields a whopping 12%! That’s roughly six times bigger than the average yield of the Dow. If you’d like to tap into this income stream, and earn six times bigger dividends, click here for our full report on this opportunity.