September 30, 1991

High-dividend stocks are always popular with conservative
investors, who like the steady income they provide. But with money
fund rates sinking and the stock market hitting new highs, investors
of all stripes should consider high- yield stocks. Not just any
high-yield stocks, of course, but the ones with completely secure
payouts and the prospects of steady dividend increases in coming
years. Here's how such select income stocks compare with other
Money-market funds. The average money fund recently paid 5.4%, 0.1
to 3.9 percentage points less than the stocks discussed here.
Bonds. Top-grade corporates pay an average of 8.1%, but unlike
dividends, bond yields you lock in now have no growth potential.
Growth stocks. A new study by the Leuthold Group, a Minneapolis
investment advisory firm, shows that in the past, when the yield on
the S&P 500 was under 3.3%, as it is now (3.1%), the S&P's average
annual total return over the next three years was only 3% to 6%. Buy
a stock with a yield of at least 5% and you are almost certain to
beat that return.
To identify the best income stocks in the world, MONEY asked a
dozen analysts and portfolio managers to recommend companies that
meet these criteria: yields of at least 5%, likely dividend growth of
better than 5% a year, and lower-than-average price/earnings ratios.
To take advantage of the higher interest rates abroad, we asked the
pros to consider foreign companies as well, if their shares traded
here as readily accessible American Depositary Receipts. The six
selections that made our final cut (below and in the table on page
71) include two British stocks.
-- American Health Properties (yield: 9.3%). Organized as a real
estate investment trust, American Health Properties, with $478
million in real estate assets, is actually a health-care stock in
disguise. The company leases facilities to 24 flourishing, for-profit
specialty hospitals in 14 states. In addition to income from the
leases, in most cases AHP collects 5% of the hospitals' revenue above
a certain threshold, according to James Melcher, president of the New
York City money-management firm of Balestra Capital. AHP has raised
its dividend for 14 consecutive quarters. And Todd Richter, health-
care analyst at Dean Witter, thinks the payout will increase by 8% a
year over the next five years.
-- Hanson (7.1%). This British-based conglomerate with projected
1991 revenues of $13.3 billion is known for deftly acquiring dozens
of companies, shedding unprofitable divisions and cutting overhead.
The result: since 1986, profits have soared 35% annually, and
dividends have shot up by 40% a year.
Yet Hanson has languished recently even as the London market
reached new highs. Why? New York City money manager Arnold Schmeidler
cites two reasons. One is the 2.8% stake Hanson acquired in May in
$23 billion Imperial Chemical Industries, Britain's largest chemical
maker. Analysts speculate that Hanson will launch a hostile bid for
ICI that could end up costing $20 billion. Second, Hanson gets 17% of
its profits from currently depressed construction- related
Schmeidler, however, says these concerns are overblown. He
believes that the housing industry will recover and that Hanson would
sell off parts of ICI to reduce any acquisition debt if it were to
gain control. His forecast: earnings and dividends will increase 10%
annually for the next five years.
-- British Petroleum (6.8%). With projected 1991 revenues of $58
billion, BP is the world's fourth largest oil company. Almost all of
its abundant reserves are in the British North Sea and Alaska's North
Slope, where production is well established.
Brian Rogers, portfolio manager of the T. Rowe Price Equity Income
Fund, thinks that most of BP's growth will come from major oil
deposits it recently discovered in the Gulf of Mexico and off the
coasts of Colombia and Ecuador. ''BP should be able to increase its
yield by 7% a year,'' he says.
-- Pacific Gas & Electric (6%). Serving the growing population of
48 counties in northern and central California, PG&E stands to post
revenues of $9.6 billion this year. James Melcher of Balestra Capital
likes PG&E because it has recently agreed with the California public
utility commission on an unusual program that will allow the
utilityto benefit from conservation expenditures. The deal calls for
PG&E to spend $2 billion on various energy-saving measures, including
rebates to customers who purchase energy-efficient appliances. The
utility will be entitled to a 15% return on that $2 billion
investment, just as if it had used the money to expand generating
capacity. Melcher expects the company to boost dividends 5% annually
over the next five years.
-- GTE (5.7%). With its acquisition of Contel, a major telephone
company, now complete, GTE is the largest provider of local telephone
service in America and the second biggest cellular-phone operator.
Its estimated 1991 revenues: $22.5 billion. Nola Falcone, portfolio
manager of the Evergreen Total Return Fund in Purchase, N.Y.,
calculates that GTE's 18.6 million local subscribers and 687,000
cellular customers, plus its minor businesses, are worth $54 a share,
nearly double its current stock price of $29.50. Falcone believes the
company will be able to get more earnings out of its cellular
business. Meanwhile, she says, ''the local phone companies will
continue to throw off cash to allow the yield to rise about 9% a
-- Transamerica (5.5%). By casting off such extraneous operations
as Budget Rent-a-Car over the past few years, Transamerica has
focused on its core businesses with projected 1991 revenues of $7.2
billion -- life and property/ casualty insurance, consumer lending
and equipment leasing. Transamerica has largely avoided the two
pitfalls that snared other big insurers: commercial real estate loans
and junk bonds. Commercial real estate loans represent only 1.8% of
Transamerica's $33 billion in assets, well below the industry
average of 24%, and only 0.2% of those loans are in trouble. Junk
bonds, meanwhile, account for a mere 2.8% of the company's portfolio,
vs. the industry average of 7%. Its assets are mostly in dull but
reliable government and investment-grade corporate bonds. Rogers of
T. Rowe Price believes that Transamerica earnings and dividends will
grow 10% over the next five years.

Analysts say these six companies, all trading on the New York
Stock Exchange, will continue to boost earnings and dividends over
the next five years. P/Es are based on profit estimates for 1992.
Companies are ranked by yield.

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