The Best 3 High-Yield, Top Quality, S&P 500 Stocks For 2014

So says Steve Mauzy (wyattresearch.com) in a paraphrased introduction to his original article* entitled Top 3 High-Yield S&P 500 Stocks for 2014.

[The following is presented by Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com and www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]

Mauzy goes on to say in further edited excerpts:

Tread carefully; inclusion in the S&P 500 doesn’t automatically confer an investment grade. For instance, I want nothing to do with the highest-yield S&P 500 stocks: Windstream (NYSE: WIN)  @ 12%, Frontier Communications (NYSE: FTR) @ 8.5%, or CenturyLink (NYSE: CTL) @ 7%. These S&P 500 stocks are high yield not because of superior cash flow, they’re high yield because of a falling share price and a dying business model.

Better income opportunities reside in…AT&T (NYSE: T), Altria (NYSE: MO), and Diamond Offshore Drilling (NYSE: DO) whose yields are slightly lower than the above mentioned trio, but whose cash flows are sustainable and much more likely to increase over time. All three of these S&P 500 stocks yield above 5%, and all three are much better positioned to maintain their high yield.

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AT&T

I like AT&T because it, and Verizon (NYSE: VZ), rule the cellular communications space.  I view AT&T as the better value, though. It:

• yields 5.3% compared to Verizon’s 4.3%
• trades at a forward P/E multiple of 13.1 compared to Verizon’s forward P/E multiple of 13.9,
• has annual revenue and earnings growth in the 5% – 7% range.  Growth is unspectacular, to be sure, but the business model
• generates ample cash to keep the dividend payout moving higher year after year – which it has done for the past 30 years.

High yield combined with dividend growth are a potent wealth-creating combination that’s difficult to overlook, which is why I’m not overlooking AT&T.

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Altria

High yield and dividend growth is also why I’m not overlooking Altria, the maker of Marlboro cigarettes and Skoal smokeless tobacco. It

• yields 5%, and they always seems to yield 5%.
• consistently hikes its dividend payout 8% – 10% year after year, which it has done for the past 45 years and, as the payout goes, so goes Altria’s share price – a long-term average annual total return of 20% – the best in the S&P 500.

Altria hit for the average again in 2013. I expect more 20% annual returns are forthcoming.  Each year the company rings more profit out of each cigarette sold. This remarkable ability to do more with less keeps the needle moving and makes Altria a difficult company to bet against.

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Diamond Offshore Drilling

Diamond Offshore Drilling has been hit by a plague of maintenance problems on some of its larger drilling rigs over the past year and one of Diamond’s customers, the Brazilian energy company OGX, filed for bankruptcy. When OGX’s financial problems surfaced this past summer, investors began selling Diamond shares, which are down nearly 15% in the past six months. I am confident, however that Diamond shareholders will finally see value created in 2014 as its problems are put behind it for the following reasons:

• management has stated that maintenance costs will return to historical norms in 2014
• write-offs related to OGX’s bankruptcy are expected to approach $60 million,
• the two large rigs which had been working for OGX are being sent for work in the Pacific and
• management is committed to the annual $3.50-per-share dividend, which generates a generous 6.2% yield on Diamond’s depressed share price.

Despite recent problems, Diamond is still a well-run, conservatively managed company. It maintains low debt levels at 0.33% of capitalization, and a high cash level at $1.2 billion.  It’s also a company run by the Tisch family, which has an exemplary record of creating shareholder value.

 [Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]

*http://www.wyattresearch.com/article/sp-500-stocks-for-2014/ (© 2013 Wyatt Investment Research; Disclosure: Stephen Mauzy owns shares of Diamond Offshore Drilling)

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