Five High Yielders With Growth Potential

 | Jul 19, 2013 | 3:00 PM EDT
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It's important for income investors to not only consider a stock's current dividend yield, but also to evaluate how a company's dividend may change over time.

All else equal, a company is more likely to increase its dividend payment in the future if its earnings rise (which will generally provide it with more cash flow). While sell-side forecasts aren't always correct, we can at least screen high-yield stocks for those with high consensus future earnings per share growth rates and use these as a list of initial ideas for further research. Read on for our quick take on five stocks which currently yield at least 4% and, according to data from Fidelity, have an expected long-term earnings growth rate of at least 10%.

One notable stock on the list is Freeport-McMoRan Copper & Gold (FCX), which is down 28% since the beginning of December. The decline is a result of poor market conditions for its products and of the company's questionable decision to buy two oil and gas companies. It currently trades at 8x consensus earnings for 2014, with analysts expecting decent earnings growth beyond that point. It offers a dividend yield of 4.5%.

It's possible that markets have overreacted to bad news and we believe Freeport-McMoRan is worth considering. As part of our work in researching investment strategies, we track quarterly 13F filings from hundreds of hedge funds and other notable investors. By using the information included in 13Fs, we have found that the most popular small-cap stocks among hedge funds earn an average excess return of 18 percentage points per year). We can also use this database to track interest in individual stocks, and so can see that billionaire John Paulson's Paulson & Co. owned 9 million shares as of the end of March.

Offshore driller SeaDrill (SDRL) also meets our criteria is contract Its most recent quarterly dividend payment was 88 cents, which implies a quite high yield at current prices (though we'd note that the company's dividends tend to fluctuate somewhat over time). Wall Street analysts are generally optimistic about the prospects for offshore drilling, which tends to be more capital intensive than on shore exploration and production. Therefore, it does depend on high oil prices to offer attractive internal rates of returns to oil and gas companies. Analyst forecasts are for over 20% earnings growth going forward, contributing to a five-year price- earnings to growth ratio of 0.7.

Another offshore driller offering a good yield and expected to grow its business over the next few years is Transocean (RIG). Billionaire activist Carl Icahn has taken a large position in Transocean; his stake was worth over $1 billion at the end of March and he now owns over 5% of the company. He has been agitating for higher dividend payments, even though the current yield is quite generous at 4.5%. As with SeaDrill, the Street is fairly bullish: consensus is for $5.95 in earnings per share for 2014, which makes for a forward P/E of 8.

Verizon (VZ) has been paying 51.5 cent quarterly dividends for a year and at current prices that equates to an annual yield just over 4%. Verizon's net income grew by 16% in the first quarter of 2013 vs. a year earlier, though the company's revenue grew at a considerably lower rate.  We would be concerned about the sustainability of high profits growth.

We would also note that Verizon has little exposure to broader economic conditions, with a beta of 0.3, though potential shareholders should also be aware that the company has shown an interest in acquiring Vodafone's minority stake in Verizon Wireless.

Cigarettes are generally taken as a mature industry, though analysts actual project double-digit earnings growth for the next few years at Lorillard (LO), one of the smaller publicly traded companies in the industry. As with many other cigarette companies, Lorillard offers a high yield (of close to 5% at current dividend levels) and the payout ratio is not too high here as well.

The stock trades at only 15x trailing earnings, and with revenue and earnings up recently going by recent reports, it might actually be of interest to value investors as well as to those looking for high yields.

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