Best of the Best Dividend Paying Stocks

August 6th, 2012
in contributors

Money Morning Article of the Week

by Don Miller, Contributing Writer, Money Morning

Income investors are on a never ending search for the highest dividend-paying stocks but most of them don't know where to look.  They either settle dividends-pictureSMALLfor dividends that are far too low and may never grow a penny...or they take on way too much risk.

But there's a simple solution if you're looking to boost your income stream.

Fact is, there are at least three sectors right now where investors can safely build a fortune in high paying dividend stocks. Here's why.

Click on graphic for clearer picture of dividends.

Follow up:

The Highest Dividend-Paying Stocks that Outperform

History shows that investors who hold great dividend-paying stocks can outperform every other major sector-- including gold, silver, T-Bills, or bonds--by a wide margin.

From 1972 through 2007, dividend-paying stocks returned between 8.9% and 10.9% on average every year, according to a recent study by Ned Davis Research. Meanwhile, non-dividend paying stocks brought in a paltry 2.5% gains.

In other words, high dividend stocks provide 4.5 times greater wealth building power than non-dividend payers!

Here are three market sectors that are chock full of the highest dividend-paying stocks that offer growth potential and a measure of safety to boot.

1.  Mortgage "Banks" With Double-Digit Yields

Much like a bank these companies run a simple business. They borrow money at low rates and reinvest or lend it out at higher rates.

When their cost of borrowing is low, these companies practically print money.  And thanks to the Federal Reserve's promise to keep interest rates at near zero until 2014, they're now borrowing money at the lowest rates in history.

It's no surprise then that these companies are raking in the profits. They borrow money at about 1.5% and reinvest it in government guaranteed mortgages at roughly 4%.

That's great news for investors. Because, by law, these mortgage REITs pay out basically all of their earnings in the form of dividends.

Two of our favorite mortgage REITs, Annaly Capital Management Corp. (NSYE: NLY) and Two Harbors Investment Corp. (NYSE: TWO) are currently paying investors whopping dividend yields of 12.6% and 13.9%, respectively.  Both of these companies invest primarily in residential mortgage-backed securities that are fully guaranteed by Fannie Mae (OTC: FNMA), Freddie Mac (OTC: FMCC) or other government agencies.

Even better, both these companies have the potential to deliver attractive long term capital appreciation.

2.  Two MLPs With Hefty Distributions

Most MLPs are involved in the business of connecting producing energy fields with refineries, distribution, and retail sales.  Not only do these companies pay hefty "distributions" to their owners year after year - but some also offer substantial price appreciation as well.

Right now, several of the 50 companies in the benchmark Alerian MLP Index offer yields of 7.5% or higher.  Things should only get better from here.  Explosive growth in shale and other unconventional gas production has given MLPs a wave of new opportunities. That should allow them to make even bigger distributions to investors.

Here are two of the best:

  • Kinder Morgan Energy Partners LP (NYSE: KMP) is the largest MLP and the fourth-largest energy company in North America. The company operates approximately 75,000 miles of pipelines that transport natural gas, refined petroleum products and crude oil.   KMP yields a juicy 6.1%, distributing a whopping $4.92 annually to its shareholders and has raised its dividend 44 times since 1997.
  • Enterprise Products Partners LP(NYSE: EPD) just raised its distribution for the 30th consecutive quarter. Growth in the Rocky Mountains and the Eagle Ford Shale has pushed natural gas production to record levels. Its current yield of 5.26% and steady record of boosting distributions makes it an attractive target for long-term investors.

3.  REITs on the Rebound

REITs invest in real estate properties or mortgages. The real beauty of REITs is that they are required to distribute 90% of their taxable income to investors.

Shares of REITs were clobbered when the housing bubble burst in 2007. In fact, many dropped in value by 40%-70% from their highs. Now that the housing market is crawling back REITs are on the rebound.

In fact, one particular REIT was able to keep raising its dividend payout right through the housing storm without missing a beat.  It is National Retail Properties Inc. (NYSE: NNN) which raised its dividend on July 16 to $1.58 per share -- the twenty-third consecutive year that the company has increased its dividend.  The increase made National Retail one of only four publicly traded REITs to have increased annual dividends for 23 or more consecutive years.

This REIT is no stranger to big investors, either. Institutional investors like Vanguard Group Inc., and JP Morgan Asset Management own nearly 90% of the company.

Between these mortgage "banks", MLPs and REITs, investors should have no problem finding some of the best of the highest dividend-paying stocks in the market.

You just need to know where to look.  One good general reference at is Buying Stocks that Pay Dividends

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1 comment

  1. richard says :

    I would like to share one of the main advantages of dividend stocks over other income sources is their tax treatment. While interest and other income from sources such as bonds are taxed at the individual’s normal income tax rate, dividends are taxed at a special rate.



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