A number of investors are still sitting on a large pile of cash waiting for the ‘next best thing’ in capital markets in order to continue increasing their net worth. However, the current low interest rate environment is not helping. As companies refinance their debt at much lower rates, investors are finding it hard to justify putting their cash to work in return for a mediocre return.
In the not so distant past, not only did investors benefit from large pay cheques that hit their account each time a bond paid out its coupon but they also benefitted from price appreciation as the value of their investments increased.
Nonetheless, this does not mean a portfolio cannot continue generating positive returns. However, in order to do so, an investor must adapt to change by accepting the current reality of low interest rates and focus on other asset classes that can make up for lower bond coupons.
The global economy is growing, the unemployment rate is decreasing and consumers are spending more. The end result is positive for companies as they increase both their profit and loss and balance sheets. This is resulting in a stock market rally, which in turn increases the net worth of an investor’s portfolio.
It may not be easy for someone who is accustomed to buying bonds to shift some of their portfolio to equities. However, it is important to do so. A good way to go about this is by looking at high quality stocks that pay attractive dividends. This way, one would not only be able to benefit from growth but also continue to receive the ‘coupon’ in the way of a dividend.
A dividend is a distribution of a portion of a company’s earnings to shareholders. Dividends can be issued as cash payments or in the form of shares.
High dividend paying exchange traded funds: An exchange traded fund (ETF) is a marketable security that tracks an index. It has higher daily liquidity and lower fees than mutual fund shares, making it an attractive alternative for individual investors.
The Euro Stoxx Select Dividend 30 UCITS ETF (EXSG) in euro is trading on a gross 12-month dividend yield of 7.90 per cent. The ETF includes 30 high dividend paying stocks, including Societe Generale, Allianz, Total, Siemens and Deutsche Post.
Despite equity markets rallying strongly, we believe that there is still value out there
The ProShares S&P 500 Dividend Aristocrats ETF (NOBL) in dollars is trading on a 12-month gross yield of 2.00 per cent. Dividend Aristocrats are US companies that have raised their dividend payments for at least 25 consecutive years. The ETF includes companies like McDonald’s, Procter & Gamble, Coca-Cola, AT&T and Exxon Mobil.
Attractive high dividend paying stocks: Below is a selection of high dividend paying stocks we believe are attractive for shareholders to hold in their portfolio:
Societe Generale (GLE) EUR – Indicative gross yield 4.70 per cent: Given our positive outlook on the European economy and potential for interest rate hikes in the not so distant future, we believe this company is trading at a discount to its intrinsic value. Company management also reiterated that the dividend is unlikely to decrease.
Allianz (ALV) EUR – indicative gross yield 4.20 per cent: Operating profitability across each of Allianz’s main business lines has proved resilient over the years. Allianz is well positioned to benefit from future economic growth. Coupled with a strong balance sheet we find Allianz to be an attractive and relatively ‘safe pair of hands’ investment.
Deutsche Post (DPW) EUR – indicative gross yield 3.00 per cent: We believe management are capable of increasing organic growth and improving margins. We do not expect material spending on mergers and acquisitions and therefore any excess cash generated will likely be returned to shareholders.
PepsiCo (PEP) USD – indicative gross yield 2.80 per cent: PepsiCo has managed to deliver consistent top-and-bottom line performance. PepsiCo has a product mix poised to deliver solid organic top line growth and a track record of consistently beating the market expectations over the past few years.
McDonald’s (MCD) USD – indicative gross yield 2.35 per cent: McDonald’s is a long-term core holding in a portfolio with relatively low risk and solid absolute return. Investors should focus on the company’s free cash flow generation and improved margins going forward through cost savings and revenue expansion.
AbbVie (ABBV) USD – indicative gross yield 3.40 per cent: We believe the risk/reward for this stock is fairly balanced and reflects a reasonably positive outlook as well as some pipeline success. An attractive valuation relative to its US major pharma peers, strong dividend yield, and solid medium-term growth outlook are positives for the stock.
Despite equity markets rallying strongly, we believe that there is still value out there. A well-diversified portfolio that is focused on sectors that are expected to outperform in the current environment should continue to reap rewards from the equity market.
Kristian Camenzuli is an investment manager at Calamatta Cuschieri.
The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.
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