Most of the dividend-paying stocks I feature here come from the Dick Davis Dividend Digest, which exclusively recommends income-generating investments. However, the latest Investment Digest, featuring our contributors’ Top Picks for 2012, had its fair share of dividend-payers too. I’ve written before about how dividend-paying stocks are becoming more popular with all investors, not just traditional income investors, and our contributors are clearly no exception. Dividend-paying stocks are often less volatile than their non-yielding counterparts, and in these roller-coaster days, more stability is something most investors would like for their portfolios.
The stocks below all come from the Investment Digest Top Picks, and they all have yields of at least 2%, in addition to growth potential.
Dan Sullivan, editor of The Chartist, recommends McDonald’s Corp. (MCD) for both its growth potential and its yield of 2.8%:
“This iconic restaurant chain now operates 32,943 restaurants in 117 different countries. The company recently reported same-store sales growth of 7.4% and third quarter earnings per share of $1.45, which is 12% higher than the same period a year ago. These are excellent numbers given the current tough economic conditions that exist across the globe. The company has a very rare A++ financial strength rating. Not only is McDonald’s financially strong, its technical picture is bright. The stock has trounced the S&P 500 this year, gaining 31%. The stock is not only trading at a 52-week high, it is close to an all-time high. The company also sports a very attractive yield of 2.90%. We would expect the stock to be a star performer again in 2012.”
Stephen Quickel, editor of US Investment Report, recommends Insperity, Inc. (NSP), which currently yields about 2.1%:
“In 2008 CEO/cofounder Paul Sarvadi’s 20-year-old Administaff, Inc. encountered serious growing pains. It provided staff outsourcing to small- and medium-sized companies like itself. With the economy and hiring beset by recession, revenues stopped growing at $1.6 billion and its earnings and stock price nose-dived. But Sarvadi had lots of cash and no debt. So he started shaking things up. First, he expanded to become a full-service human resources department for clients in 24 major U.S. markets, everything from recruiting to performance management. To reflect the transformation, he changed its name last March to Insperity. ‘It’s not in the dictionary,’ he says. ‘It means to inspire prosperity'—both its own and that of its up-and-coming clients. Today it’s paying off. Insperity has scored eye-catching earnings surprises in seven consecutive quarters. Analysts look for a 2011 jump from $0.86 to $1.27 per share, then to $1.69 in 2012 and $2.00-plus in 2013—rising at a 34% annual clip. NSP shares, up from 19 to 25 since September, still trade at just 14.8 times 2012 earnings and a forward PEG ratio of 0.43—with a 2.4% dividend yield to boot. The consensus price target is 36—and more when hiring resumes and the P/E reverts toward its 20x norm.”
Finally, Ingrid R. Hendershot, editor of Hendershot Investments, likes Paychex, Inc. (PAYX), which currently yields almost 4%:
“Paychex, Inc. is a leading provider of payroll, human resource and benefits outsourcing solutions for small and medium-sized businesses. With a strong brand, Paychex has more than 100 offices nationwide and serves more than 564,000 payroll clients. The company’s average client has 17 employees. Payroll processing is the bedrock of the company’s business and will continue to be so in the future. There are over 11 million businesses in the markets Paychex serves, with only a 15% penetration rate by the industry—providing plenty of future growth opportunities. The company also is focusing on selling complimentary services to its payroll clients in all markets, with growth rates in human resource services outpacing payroll growth.
“Turbulent economic times and high unemployment have proven challenging for Paychex’s operations in recent years as many small businesses have struggled, although business trends are now improving. Management reaffirmed its guidance for fiscal 2012 with revenues growing in the range of 7%-9% and earnings growing in the range of 5%-7%. Despite difficult business conditions, Paychex’s operations remain highly profitable. Excellent net profit margins have averaged more than 26% over the last five years, which have contributed to the company’s outstanding 35% average return on shareholders’ equity over the same period. These high returns are even more impressive when one considers that the company operates with a cash-rich and debt-free balance sheet. With minimal capital expenditure needs, the company generates bountiful free cash flows. Paychex has returned most of this cash to shareholders through share repurchases and dividends. The stock dividend currently yields a generous 4.3%, and management remains intent on maintaining its strong dividend policy with a target of paying out 80% of earnings. Long-term investors should consider picking up a paycheck from Paychex, a HI-quality company with a strong brand, profitable operations and a generous dividend yield. Buy.”
With their solid dividends and reliable growth, McDonald’s, Insperity and Paychex would all make good additions to any kind of portfolio.
Wishing you success in your investing and beyond,
Chloe Lutts
Editor of Investment of the Week
