Five cash cows that will keep delivering top yields

 

Investors sometimes underestimate the power of dividends. While the quarterly distributions may not feel like a major boost to an overall portfolio, when you steadily accumulate the income over time, the impact is very real, and very material.

There are multiple ways to handle dividends. While some investors prefer to simply collect the cash to use for income or to invest in other securities, I prefer to use a dividend reinvestment plan to slowly but surely accumulate additional holdings in the underlying security. By using a DRIP plan, each quarter I own a fractionally larger number of shares, so each future distribution is slightly higher than previous one. If you use this strategy on stocks that increase their dividends each year, then once a year you get an even bigger boost to your share count and distributions.

Dividends are a powerful way to use your investments to generate cash. Some stocks are bonafide cash cows that deliver large dividend yields to their investors. Of course, you can not simply buy a stock because it has a large dividend and expect long-term success. If the underlying security is weak, you could quickly give back all your distributions and then some as the stock moves lower.

The recipe for success here is to find strong stocks, with big dividends, that have a history of dividend growth and a high likelihood of future price appreciation. Easier said than done – but definitely not impossible.

Let’s look at five cash cows that could easily keep delivering top yields and stock gains.

BB&T

Regional bank BB&T (BBT) has done a great job rewarding investors in recent years, and the stock currently offers a 2.8% dividend yield. Like most bank stocks, the company was forced to slash its dividends during the financial crisis, but it has managed to grow its quarterly distributions each of the last six years, and it should continue to grow moving forward. The economic landscape is perfect for bank stocks right now, and regional banks in particular should benefit from higher interest rates as they are able to widen the spread on interest they charge customers versus the interest they have to pay to borrow money needed to make loans. The financial sector has been hot over the last year as Wall Street realizes the benefit higher rates will have on all the stocks in the sector. BBT currently trades at $53.92 with an average price target of $57.79.

Chart courtesy of www.stockcharts.com

Kohl’s Corp.

Off-price retailer Kohl’s Corp. (KSS) has been a top performing stock over the last year, with shares currently trading just shy of their 52-week high. Discount retailers have been strong over the last year, and a strong underlying economic, coupled with low unemployment should continue providing strength to the sector. Kohl’s has an impressive 3.7% dividend yield, and the company has grown its dividend each of the last seven years. Looking ahead, analysts expect the retailer to grow earnings by 9.8% per annum over the next five years, which is strong enough growth to keep Wall Street bullish on the stock and drive shares higher. The retail landscape can change quickly, but Kohl’s is known for having name-brand products at discount prices, which will always keep shoppers interested. The stock trades at $67.10 with an average price target of $69.69.

Chart courtesy of www.stockcharts.com

Sysco Corp.

Food distribution leader Sysco Corp. (SYY) is a true dividend aristocrat with a 47-year streak of dividend increases. The stock currently offers a 2.2% yield, and shares are now trading just pennies below their all-time high. The company has been growing at a rapid pace, with earnings up 10.5% per annum over the last five years, and analysts expect average annual earnings growth of 14.3% a year over the next five years. These strong growth numbers for such a mature company are incredibly impressive and will likely keep the stock among Wall Street’s favorites moving forward. SYY trades at $65.06 with an average price target of $64.63.

Chart courtesy of www.stockcharts.com

Aflac

Life insurance provider Aflac (AFL) has enjoyed strong gains over the last year. The insurance sector is among the sector best positioned to take advantage of rising interest rates as insurance companies generate a large portion of their overall profits from interest income. This is because insurance companies are able to invest the premiums they are paid in short-term fixed income assets until the funds are needed to pay out customer claims. The higher interest rates rise, the higher insurance companies’ interest income rises. As such, we have seen the majority of insurance companies gain in share value over the last year as the Federal Reserve has moved to slowly lift rates. AFL is another dividend aristocrat, with a 35-year streak of dividend increases, and the stock currently offers an attractive 2.31% yield. The stock trades at $44.68 with an average price target of $47.33.

Chart courtesy of www.stockcharts.com

McDonald’s

Fast food leader McDonald’s (MCD) has increased its dividend each of the last 41-years, and the stock currently offers a 2.5% yield. The company has done a good job adapting to a shift in consumer taste away from unhealthy fast food to healthier menu options. America has an obesity problem, and fast food, along with sugary soft drinks, are two main problems. As Americans started to become more health conscience, fast food chains struggled to maintain sales, much less grow them. McDonald’s tackled the problem by introducing an all-day breakfast menu, revamping its overall menu, and running a variety of discount promotions to attract customers. The changes have been working, and U.S. sales are once again on the rise. The company’s most recent quarterly report in April was much better than expected – driving the stock higher reassuring Wall Street that the fast food king is still a great long-term investment. MCD trades at $161.15 with an average price target of $185.95.

Chart courtesy of www.stockcharts.com

Symbols: AFL BBT KSS MCD SYY
Michael Fowlkes

Michael Fowlkes

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.

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