A Cure for the Bond Yield Blues

Per our posting earlier this week, we are very wary of long-term bonds. As investors experienced in 2013, any minimal increase in interest rates from the current low levels can quickly lead to meaningful losses of principal. We believe that locking in the current very low interest rates for any length of time just doesn't make sense. For investors with a mid- to longer-term horizon who have current income needs, our best advice is to take some of your bond money and buy a laddered portfolio of short-term bonds. We would also recommend taking a healthy portion of your bond money and buying a diversified portfolio of higher yielding stocks. Our focus on generating the below list of high dividend stock purchase recommendations is: a high current yield, good dividend growth potential, a modest stock price valuation level and a favorable short- and intermediate-term business outlook. In addition, we looked for companies and industries that we thought could perform in a rising interest rate environment. Finally, the list also includes companies that have basically missed the entire 2014 market rally. We believe all of these stocks should provide investors with lower volatility, a good and growing income stream and the likelihood of solid appreciation potential over the next six to nine months. As stated above, we believe all of these names will fare well in the rising interest rate environment that we envision. Following is the list of the names we recommend with some brief thoughts on each: AT&T (T), a leading wireless and wireline telecommunications provider, should generate consistent earnings and dividend growth in the mid-single digits over the next three to five years. The shares have a current dividend yield of 5.26%, and trade at 13.5 times 2014's earnings. Eaton (ETN), a leading industrial equipment supplier, is on track to generate low double digit earnings and dividend growth over the next three to five years. The shares have a current dividend yield of 2.8%, and trade at 15.2 times 2014's earnings. General Electric (GE), a leading industrial and financial conglomerate, is poised to generate consistent earnings and dividend growth in the high-single digits to low-double digits over the next three to five years. The shares have a current dividend yield of 3.4%, and trade at 15.5x 2014's earnings. McDonald's (MCD), a leading global fast food provider, should generate consistent earnings and dividend growth in the mid-single digits over the next three to five years. The shares have a current dividend yield of 3.48%, and trade at 16.7x 2014's earnings. We expect the company to increase this already healthy dividend later this month. Pfizer (PFE), a leading pharmaceutical company, is on track to generate consistent earnings and dividend growth in the mid-single digits over the next 3 to 5 years. The shares have a current dividend yield of 3.55%, and trade at 13 times 2014's earnings. Royal Dutch Shell (RDS.B), a leading integrated energy company, should generate consistent earnings and dividend growth in the mid to high-single digits over the next three to five years. The shares have a current dividend yield of 4.44%, and trade at 11x 2014's earnings. United Parcel Service (UPS), a leading global shipping company, should generate consistent earnings and dividend growth in the mid to high-single digits over the next three to five years. The shares have a current dividend yield of 2.74%, and trade at 19.8x 2014's earnings. Taken together, the above basket of stocks has a starting dividend yield of 3.67%. We believe high quality, higher dividend yielding stocks will offer investors a better total return potential in the upcoming year than the abysmal interest rates (and risks) currently offered by traditional fixed income investments. While all stocks (even lower volatility higher yielding ones) do entail market volatility and risk, we consider them to be appropriate vehicles for a portion of income oriented investments in the upcoming year.

A Cure for the Bond Yield Blues

Here is a list of seven higher yielding stocks you can use.

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