The Never-Ending Search for Yield Leads to U.S. Dividend Stocks

NEW YORK (TheStreet) -- U.S. interest rates remain near record lows, forcing investors to continue on the never-ending search for yield. That path may lead them directly into U.S. dividend stocks.

iShares Dow Jones Select Dividend Index  (DVY) has rebounded by 3% after declining throughout the month of July. The dividend exchange-traded fund is mostly weighted by Lockheed Martin  (LMT) , Chevron (CVX) , Philip Morris International  (PM) , ConocoPhillips (COP)   and McDonald's  (MCD) .

 DVY Chart

DVY data by YCharts


Interest rates have been pushed lower in the United States on geopolitical and economic reasons. For most of the year, fear of violence overseas in Gaza, Iraq, and Ukraine have pushed funds into U.S. assets, such as iShares Barclays 20+ Year Treasury Bond (TLT) and PowerShares DB US Dollar Index Bullish (UUP) .

The rush of funds has accelerated recently as weak economic data in Europe and the U.S. led investors to believe few developed economies were interested in raising benchmark lending rates anytime soon.

As global interest rates have been pushed to record lows, investors have been forced to seek out relatively safe investments that can also deliver some semblance of return.

That journey has led them back into U.S. stocks, and more specifically dividend-bearing stocks. U.S. dividend stocks offer the safety of being in a moderately growing economy, alongside steadily improving corporate earnings.

Compare that to Europe, which is seeing declining growth, deflationary conditions, and heavy exposure to the conflict in Ukraine.

InvestorPlace.com just released a list of top performing U.S. dividend stocks for August, giving investors some clues where money could be best allocated.

The top three companies on the list are:

3. Frontier Communications (FTR)

Dividend Yield: 6%

Frontier Communications is a regional telecom with junk-bond-type yields. The stock, at $6.50, is having an incredible year, up 41% so far in 2014.

The company is focusing on retaining customers and cutting costs. Analysts believe Frontier Communications will post profit increases in both 2014 and 2015. This, alongside a river of free cash flow, helps ensure the fat dividends will keep coming.

 2. Transocean (RIG)

Dividend Yield: 7.6%

Transocean is an offshore driller that has been beaten down due to stagnant energy prices recently. The stock, at $39, is off more than 20% for the year to date.

The company is in the midst of a restructuring, which will spin off eight rigs into a new publicly traded company. But that won't do much for the stock in the short term. Despite the disappointing fundamental picture, Transocean continues upping the dividend yield, hopefully leading to positive total returns when the share price does improve.

1. Windstream Holdings (WIN)

Dividend: 9.9%

Windstream Holdings is the long-reigning champion of S&P 500 dividend stocks. The company's dividend yield, however, has fallen this year from over 12% to 9.9%.

Investors are not too concerned, though, as the stock is up more than 40% for the year to date. This share price appreciation has been the main culprit in the falling yield. At around $4, shares are up nearly 11% for the year to date.

Windstream is highly leveraged and pays out more in dividends than it makes in earnings, which is a caution to investors looking to get in now. It does, however, generate ample free cash flow that should allow the company to continue paying out current dividends.

U.S. markets continue to be the most attractive assets on the planet, and with record low interest rates, expect dividend stocks to continue pushing higher.

 

WIN Chart
WIN data by YCharts

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

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This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

TheStreet Ratings team rates WINDSTREAM HOLDINGS INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:

"We rate WINDSTREAM HOLDINGS INC (WIN) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its solid stock price performance, notable return on equity and expanding profit margins. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Compared to its closing price of one year ago, WIN's share price has jumped by 38.51%, exceeding the performance of the broader market during that same time frame. Looking ahead, the stock's sharp rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. In comparison to other companies in the Diversified Telecommunication Services industry and the overall market on the basis of return on equity, WINDSTREAM HOLDINGS INC has underperformed in comparison with the industry average, but has greatly exceeded that of the S&P 500.
  • The gross profit margin for WINDSTREAM HOLDINGS INC is rather high; currently it is at 52.78%. Regardless of WIN's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 0.95% trails the industry average.
  • WIN, with its decline in revenue, slightly underperformed the industry average of 1.2%. Since the same quarter one year prior, revenues slightly dropped by 2.4%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.
  • WINDSTREAM HOLDINGS INC has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, WINDSTREAM HOLDINGS INC increased its bottom line by earning $0.39 versus $0.29 in the prior year. For the next year, the market is expecting a contraction of 47.4% in earnings ($0.21 versus $0.39).

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