6 Stocks With Dividends Beating Bond Yields

Investors in low-yielding corporate bonds should consider switching to stocks that pay big dividends.
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BOSTON (TheStreet) -- Fixed-income investors may find it hard to justify holding corporate bonds when dividend yields of the same companies offer a higher rate of return for at least the next five years.

Corporate bond yields have fallen to the lowest levels in more than a generation. According to monthly information collected by the

Federal Reserve

dating to 1919,

AAA corporate bonds

fell to 4.72% in July, the lowest since December 1965. The high was in September 1981, when the rate was 15.49%.

Keith Goddard, president of

Capital Advisors Growth Fund

(CIAOX) - Get Report

, says his clients are looking for an alternative investment strategy as bonds that used to pay a 4% yield are down to 1.5%. He recommends investors with 40% of their portfolio in bonds move to 30% and put the difference in high-dividend-yielding stocks.

If an investor is willing to own a bond for five years, he should weigh the pros and cons of a basket of high-quality stocks that may deliver an attractive dividend yield.

"It's a good idea for part of somebody's fixed income," Goddard says. "It's simply a risk/reward calculation: What is more likely to deliver a better outcome over five years? When you're starting at a 1.5% to 2.5% forecast rate of return in the bond market, it doesn't take much to beat that."

The trick, Goddard says, is to select from a smaller subset of higher-yielding blue-chip stocks. One qualifier is to find stocks that trade at 10 times earnings or less, then pick those that can increase earnings at the same rate of inflation.

Only extremely risk-averse individual investors ought to consider buying long-term bonds that pay less than 3%, says Robert Pavlik, chief market strategist at Banyan Partners.

"I don't understand why people are going into these long-term corporates with these extremely low yields. I don't get it. I really don't," Pavlik says. "I don't even understand why people are going into a 10-year Treasury for 2.70%, either. The stock market is paying more as far as a yield is concerned relative to U.S. Treasuries."

Investors take on more risk when investing in stocks rather than bonds. A company could cut its dividend in hard times -- as even

General Electric

(GE) - Get Report

famously did last year -- or may find itself in the position where it can't pay the dividend at all. But Pavlik notes that there are many companies that are cash cows, and they continue to reward investors by returning money in the form of dividends.

Capital Advisors Growth Fund's Goddard offers up a basket of six stocks whose dividends may be more appealing to fixed-income investors. Read on to see a list

TheStreet

has compiled, ranked by current dividend yield.

6.

Abbott Laboratories

(ABT) - Get Report

Share Price:

$50.06 (Aug. 13 close)

Dividend Yield:

3.52%

Coupon Rate:

2.7%, May 27, 2015, maturity

Forward P/E Ratio:

10.85, which is below the Bloomberg peer list average of 13.03 for the current year

Capital Advisors Growth Fund's View:

"No significant patent expirations that will damage its growth rate over the next five years."

Analysts' View:

Sixteen research firms, or nearly 70% of those that cover Abbott Labs, recommend that investors buy the shares. The other seven say investors should hold them. The average of 14 price targets is $61.71, implying upside of 23.3%.

5.

Kraft Foods

(KFT)

Share Price:

$29.50 (Aug. 13 close)

Dividend Yield:

3.94%

Coupon Rate:

2.625%, May 8, 2013, maturity

Forward P/E Ratio:

12.76, which is below the Bloomberg peer list average of 13.96 for the current year

Capital Advisors Growth Fund's View:

"They have cost-savings opportunities from the

Cadbury

acquisition that should enable them to meet earnings estimates for the next couple of years. Beyond that, Cadbury gave them distribution and market share in emerging markets. The odds of Kraft earning at least 20% to 25% more than it is today down the road seem very high."

Analysts' View:

Fifteen researchers, or 62.5% of those covering the stock, recommend buying the shares. Another seven analysts rate the stock a "hold" and two a "sell." The average of 16 price targets is $33.50, which is 13.6% higher than today.

4.

Exelon

(EXC) - Get Report

Share Price:

$41.37 (Aug. 13 close)

Dividend Yield:

5.09%

Coupon Rate:

4.7%, April 15, 2015 maturity

Forward P/E Ratio:

10.17, which is below the Bloomberg peer list average of 13.27 for the current year

Capital Advisors Growth Fund's View:

"Largest nuclear fleet in the utility industry. They're no different from any other utility until you think about carbon legislation or cap-and-trade. The value of that asset goes up substantially if the cost of carbon goes up. It has a 5% yield and an option on carbon legislation sometime in the future."

Analysts' View:

Most of the 22 analysts covering the firm (14, or 63%) have a "hold" rating on Exelon. The other eight researchers are split on buying the stock and selling the shares. The average of 13 price targets is $41.96, a small premium to today's price.

3.

Total

(TOT) - Get Report

Share Price:

$49.76 (Aug. 13 close)

Dividend Yield:

5.55%

Coupon Rate:

3%, June 24, 2015, maturity

Forward P/E Ratio:

6.88, which is below the Bloomberg peer list average of 10.65 for the current year

Capital Advisors Growth Fund's View:

"Right up there with

Exxon Mobil

(XOM) - Get Report

among the most successful integrated oil companies in the world."

Analysts' View:

Three research firms, or 50% of those following Total, recommend that investors hold the stock. Another two have "buy" ratings while one firm says investors should dump the shares. The average of three price targets is $59.51, a 19.6% upside.

2.

AT&T

(T) - Get Report

Share Price:

$26.72 (Aug. 13 close)

Dividend Yield:

6.29%

Coupon Rate:

2.5%, August 15, 2015, maturity

Forward P/E Ratio:

10.78, which is below the Bloomberg peer list average of 17.87 for the current year

Capital Advisors Growth Fund's View:

"AT&T is a sluggishly growing company with a safe 6.3% dividend yield. You're not going to get rapid growth out of AT&T, but the wireless business has reached a size relative to its wireline business. There was a time when AT&T couldn't grow because whatever the wireless business did was offset by losses in the wireline business."

Analysts' View:

Thirty-five analysts follow AT&T, with 20, or 57%, recommending that investors buy the stock. The other 15 have "hold" ratings. The average of 22 price targets is $29.77, 11% above where the stock currently trades.

1.

Vodafone

(VOD) - Get Report

Share Price:

$23.95 (Aug. 13 close)

Dividend Yield:

7.29%

Coupon Rate:

3.375%, November 24, 2015, maturity

Forward P/E Ratio:

9.22, which is below the Bloomberg peer list average of 12.45 for the current year

Capital Advisors Growth Fund's View:

"Vodafone has publicly committed to raising the dividend at least 7% in each of the next three years. It's incredible. Anything that happens to restructure the partnership with Verizon Wireless is good for Vodafone.

Verizon

(VZ) - Get Report

needs it more than Vodafone. If there is a buyout, Vodafone is on the sell side. That helps monetize a substantial asset on their balance sheet that gives them dry powder to do shareholder-friendly stuff."

Analysts' View:

Five analysts follow Vodafone, with four recommending the company as a "buy." Goldman Sachs suggests investors hold the stock. The average price target is $26.87, roughly 11% above where the stock currently trades.

-- Written by Robert Holmes in Boston.


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