SMILING ALL THE WAY TO THE BANK In a nervous market, consider settling for handsome dividends that will keep on growing.
(FORTUNE Magazine) – Anyone hoping that a spring thaw will stir the seeds of growth in his stock portfolio may be indulging in wishful thinking. The post-crash market has followed a sawtooth course, producing only fleeting gains. Most Wall Street strategists see more of the same ahead, while the real pessimists expect worse. In these nervous times, you may want to hold a significant proportion of stocks with generous dividend yields. That way, at least some of your return is a sure thing. Bonds, of course, offer dependable returns too. Right now, 30-year U.S. Treasuries yield 8.4%, two percentage points more than even a blue-chip electric utility stock. But the stocks give you an extra jolt that T-bonds can't match. In only three of the years since 1975 has the total return on the Shearson Lehman index of long-term Treasury bonds exceeded that of the Salomon Brothers index of 100 electric utility stocks. The utility shares outshone the Treasuries because their prices rose more sharply. Investors pick up capital gains from bonds only when interest rates decline, raising a bond's market value. But a stock's value can also be enhanced when superior management or rising sales boost earnings per share. If the bear goes back into hibernation and the stock market rallies, high- yielding stocks could take off, leaving bonds in the dust. Another advantage of stocks is dividend growth. While the coupon on a bond is frozen over its life, managements like to announce dividend increases as earnings climb. Especially these days. The Tax Act of 1986, by ending the preferential treatment of long-term capital gains effective January 1, eliminated a reason for companies to let earnings pile up. Besides, companies bulging with cash attract the attention of raiders. In the somber aftermath of Black Monday, many investors are more interested in dividends than capital appreciation. Says Russell Thompson, portfolio manager of the $1 billion United Income Fund in Kansas City: ''Because income is now more attractive than growth, companies will pay out a greater portion of earnings in dividends.'' High-dividend stocks should move ahead this year, Thompson says, as more investors come to understand the tax changes. FORTUNE canvassed Wall Street analysts and portfolio managers for their favorite high-yielding stocks. All those listed on the previous page pay a dividend equal to at least 5% of the current price, well above the market average of 3.5%. Most of the companies have been raising dividends steadily, and analysts expect all to boost payouts again in 1988. These companies meet another test: They are not robbing the future to gratify shareholders now. Most of them disburse one-half to two-thirds of earnings, retaining enough to keep the business healthy and growing. Most of these companies are well managed, earning a respectable return of about 13% on shareholders' equity. Nearly all the stocks sell for less than 15 times earnings, the market average. One caveat: Any nonutility stock yielding more than 5% may be a bargain because of worries that depress the stock price. In the case of a money-center bank company like Manufacturers Hanover, the worries are justified. Charge- offs of Latin American loans have hit earnings, with the possibility of more hits to come, and Manny Hanny's seductive 15.6% dividend could be cut. A safer bet, says Eric Miller, chief portfolio strategist at Donaldson Lufkin Jenrette, is Security Pacific, which yields 5.9%. ''Its Third World loan problems are not of quite the same magnitude as those of other money- center banks,'' Miller says. ''We're comfortable with their position for now.'' Security Pacific earned only a penny a share last year because of loan write-offs. But Miller thinks it will net $4.25 a share this year -- enough to cover the $1.80 dividend with plenty to spare. Anticipating a price war in underwriting, Wall Street has fallen out of love with property and casualty insurers. Yet manager John Neff of the Windsor Fund, a fan of high-yield stocks in general, is an unequivocal booster of Cigna, which yields 5.6%. Says Neff: ''I don't think the down cycle in the commercial property and casualty business will be as sharp as usual. And Cigna should be able to turn around its group accident and health business. The stock is cheap.'' Neff looks for a 7% to 10% dividend increase this year, to about $3 to $3.10 a share. Arley Hudson, portfolio manager of the insurer Safeco's $313 million Income Fund in Seattle, likes Lomas & Nettleton Financial, which had a disappointing 1987. The company took write-offs following troubles in its mortgage banking business with delinquent homeowners. But earnings should be back on track this year. A host of regional telephone companies and electric utilities offer high, secure yields. Bruce Johnstone, portfolio manager of Fidelity's $3.6 billion Equity Income Fund, points out that utilities with the highest yields generally have low dividend growth rates, while faster growers yield less. ''For my money,'' he says, ''I would rather own the faster growers because, with the market down, they are the ones that would appreciate more in an upswing.'' Johnstone fancies Nynex because of a recent New York State decision permitting the telephone company to keep a portion of profits above its allowable rate of return. The stock yields 5.6%, and Johnstone expects a 7% dividend increase this year. Jack Pickler, head of equity research at Wheat First Securities, a Richmond brokerage firm, is enamored of a couple of utilities close to home. Dominion Resources and Carolina Power & Light both operate in growth areas, Pickler says, and should raise their dividends 3% to 4% this year. Carolina Power yields an eye-catching 7.8% for a reason. Investors are keeping their fingers crossed until regulators allow the company to include construction costs of a recently finished atomic plant in its rate base.
CHART: COMPANY STOCK PRICE RECENT ANNUAL CURRENT RANGE PRICE DIVIDEND DIVIDEND last 12 months P/E multiple* GROWTH RATE Yield last 5 years Lomas & Nettleton Fin. $15.50-$39.25 $17.50 18% $1.40 21 7.9
Carolina Power & Light $30.25-$42.875 $35.50 3% $2.76 9 7.8
Dominion Resources $36.625-$49.375 $42.75 4% $3.08 10 7.2
Consolidated Edison $37.50-$52.00 $45.00 10% $2.96 10 6.6
Duke Power $39.375-$51.625 $46.75 4% $2.80 11 6.0
Security Pacific $20.50-$43.875 $30.75 11% $1.80 N.A. 5.9
Pacific Telesis $22.50-$33.75 $28.25 7%** $1.64 13 5.8
Cigna $41.25-$69.50 $50.25 5% $2.80 6 5.6
Nynex $58.00-$78.375 $67.75 6% 2 $3.80 11 5.6
Mobil $32.00-$55.00 $41.50 2% $2.20 16 5.3
*Multiple based on earnings for the latest four quarters. **Company formed 1/ 1/84; figures are for four years.
CREDIT: NO CREDIT CAPTION: PAYOUT POWER These companies turn up on Wall Street lists of good dividend producers. The coal-burning electric plant near Mt. Storm, West Virginia, helps generate profits for Dominion Resources. DESCRIPTION: See above.