High Dividend Stocks and Metrics to Consider When Picking Them
When referring to high dividend stocks, investors generally think of equities with above-average dividend yields.
The dividend yield is a key metric used to determine the level of dividend distributions, which astute investors — especially those seeking significant income payouts — always look for in dividend stocks. However, stocks with high dividend yields can be deceptive and result in significant losses that override dividend payouts, if they are not supported by capital gains.
High dividend stocks are fairly simple and easy to find. Most financial advice websites and stock brokerages offer tools to analyze and easily identify high dividend stocks, such as the Dividend Screener available at DividendInvestor.com.
However, investors should look beyond merely high dividend yields to invest in equities with the best prospects for long-term total returns. Therefore, before rushing and loading any individual portfolio with dividend stocks based purely on a high dividend yield, investors must consider other metrics and their relation to the share price and overall total returns.
The formula to calculate the dividend yield is quite simple. It is the ratio of any stock’s annual total dividend payouts divided by the current share price, then multiplied by 100 and expressed as a percentage.
However, while the dividend yield is easy to calculate from readily available information, investors must use the correct parameters to accurately interpret the results. The dividend yield should be considered with the share price, as the two have an inverse relationship. Because of this inverse relationship, a dividend yield rises as the share price deteriorates. Therefore, fast-rising dividend yields, which might seem like a positive indicator, might be a consequence of a substantial share price decline.
For instance, before the suspension of its dividend, Kohl’s Corporation (NYSE:KSS) had increased its dividend yield by 100% to 11.34%, which is more than five times the average dividend yield of the overall stock market. However, the company advanced its annual dividend distribution amount only 5.1% over the same one-year period. The reason for the 100%-plus dividend yield increase is primarily a 50.4% share price decline over the trailing 12 months due to the COVID-19 market decline.
While identifying a high dividend yield is a priority, investors must also consider other aspects to ensure that the high yields are truly positive indications of an equity’s performance. A simple way to ensure a positive outlook is to consider the equity’s total return on investment over a particular time frame. The total return is calculated as the combination of the stock’s capital gains and dividend income payouts divided by the share price over a specific time and expressed as a percentage.
Investors should make sure that the total return is at least slightly higher than the current dividend yield. A total return that is even fractionally above the dividend yield indicates that while most of the gains came from dividend income distributions, the share price did not decline, or the stock at least traded flat for the desired period. Furthermore, it also implies positive asset appreciation in addition to dividend payouts. For example, a total gain that is twice the current dividend yield represents that half of the total return originated from dividend payouts and the other half came from rising capital gains for that particular period.
High Yields Do Not Always Translate into High Returns
A quick search with the Dividend Screener from DividendInvestor.com reveals hundreds of high dividend stocks that offer yields in excess of 4%, which is more than twice the current market average of approximately 1.95%. The dividend yields in this group of equities go as high as 60.0% for Enzon Pharmaceuticals Inc. (NYSE: ENZN). However, Enzon Pharmaceuticals has a market capitalization of just $8.84 million. While the 60.0% dividend yield is certainly tempting to some investors, the company delivered a 23% share price drop since the beginning of 2020 and a continuous decline of more than 50% for the past several years.
To get information from more stable equities, investors should consider companies with market capitalizations of at least $1 billion. With a $2.70 billion market capitalization, the Antero Midstream Corporation (NYSE:AM) has one of the highest yields among the high dividend stocks. However, the 21.69% dividend yield is less appealing considering Antero’s share price declined enough to offset all the dividend income payouts from the past year and deliver a total loss of more than 24%.
Despite topping the list of high dividend stocks, the top 10 equities with market capitalizations of $1 billion have delivered total losses of at least 40% in the trailing 12 months, mainly due to the effects of the COVID-19 market crash.
USA Compression Partners L.P. (NYSE:USAC) is one of the equities on the list that delivered total losses for the trailing year. While USAC has a dividend yield of 18.20%, it had a total loss of 22% over the past year. However, with a current dividend payout ratio of 3,500%, the company might not be able to maintain its dividend payouts much longer. Since the dividend income offset more than all of the company’s gains over the last year, suspension of dividend payouts would eliminate almost all returns and make the stock undesirable.
Currently, the equity that delivered significant total returns from a combination of dividend income payouts and asset appreciation — B&G Foods Inc. (NYSE:BGS) — has a dividend yield of 6.57%. While less than half the Antero Midstream Corporation’s 21.69% yield, Vector Group’s dividend payouts accounted for only 10% of the company’s 71% total return over the trailing 12 months.
As previously indicated, only looking at stocks with high dividend yields is not sufficient to generate long-term total returns. In addition to high yields, investors must consider additional metrics, such as the dividend payout ratio and the share-price trend, before making any investment decisions. Furthermore, investors should analyze the magnitude of annual dividend hikes, as well as streaks of consecutive dividend boosts. While offering yields that are lower than the top equities, companies with long streaks of dividend hikes tend to outperform equities without dividend distributions. A special group of S&P 500 stocks with at least 25 years of consecutive dividend hikes, Dividend Aristocrats, have outperformed their non-dividend counterparts in the index by nearly 11% just over the past decade. These companies typically must reduce their yield to offer long-term payout appreciation and long streaks of steadily rising dividend payouts.
Types of High Dividend Stocks
There are also differences in dividend distributions based on the industry sectors. Most companies in the Technology sector funnel their earnings back into research and development to achieve or maintain some technological edge over the competition. Therefore, only the largest, oldest and well-established Technology sector companies offer dividend income payouts to their shareholders. The 1.34% average dividend yield of the Technology sector is significantly below the market average.
Other than the Technology sector, because of even higher costs to develop products, companies in the Health Care sector pay a dividend with an average yield of just 1.35%. Consumer Goods and Services sectors offer average dividend yields of approximately 3%. Companies in the Basic Materials sector offer an average yield of 2.07%. However, the 3.36% average yield of the overall Financial sector is 50% higher than the S&P 500 average. The utilities sector offers the highest yields — currently at 4.79%.
The types of business entities included in the Financial sector are one of the main reasons for high dividend yields. Created in the 1980s, to promote investing in industries with high capital requirements like the Energy sector, Master Limited Partnerships (MLPs) enjoy certain tax benefits that directly relate to the high dividend yields. Contingent on distributing at least 90% of the annual earnings to the limited partners, MLPs do not have to pay any corporate taxes and pass through most of their earnings in high dividend yields.
Another type of business entity with the same tax benefits as MLPs is a Real Estate Investment Trust (REIT), which has an average dividend yield of around 4%.
High Dividend Stocks
Dividend-paying stocks are the primary targets for income-seeking investors. Some companies listed below have been distributing dividends for more than 100 years, which displays the company’s long-lasting capabilities and dedication.
While publicly traded companies do not offer dividend yields as high as MLPs or REITs, they do offer more reliable payouts and stable dividend growth over a long-term horizon.
Below is a list of companies that offer high yields, rising dividend policies and have boosted their annual dividends over an extended period. All companies listed below are in the S&P 500 Index, with current dividend yields of near 3% and more than 15 years of consecutive annual dividend hikes.
|Company||Market Capitalization||First Dividend Paid||Consecutive Dividend Hikes||Annual Dividend||Dividend Yield|
|Helmerich & Payne, Inc. (NYSE:HP)||$1.9 billion||1990||19 years||$1.00||5.61%|
|ONEOK, Inc. (NYSE:OKE)||$12.4 billion||1939||17 years||$3.74||13.4%|
|Exxon Mobil Corporation (NYSE:XOM)||$178 billion||1882||37 years||$3.48||8.27%|
|PPL Corporation (NYSE:PPL)||$20.4 billion||1946||19 years||$1.66||6.24%|
|Chevron Corporation (NYSE:CVX)||$157 billion||1912||19 years||$5.16||6.15%|
|Realty Income Corporation (NYSE:O)||$20.6 billion||1994||19 years||$2.80||4.66%|
|International Business Machines Corporation (NYSE:IBM)||$109 billion||1916||19 years||$6.52||5.30%|
|Dominion Energy, Inc. (NYSE:D)||$67.9 billion||1925||16 years||$3.76||4.64%|
|Genuine Parts Company (NYSE:GPC)||$13.0 billion||1948||63 years||$3.16||3.51%|
|The Southern Company (NYSE:SO)||$57.6 billion||1948||19 years||$2.56||4.69%|
|3M Company (NYSE:MMM)||$86.6 billion||1916||61 years||$5.88||3.91%|
|Cardinal Health, Inc. (NYSE:CAH)||$15.9 billion||1983||19 years||$1.94||3.55%|
|Archer Daniels Midland Company (NYSE:ADM)||$23.7 billion||1927||45 years||$1.44||3.36%|
|Emerson Electric Company (NYSE:EMR)||$37.0 billion||1947||63 years||$2.00||3.23%|
|Sysco Corporation (NYSE:SYY)||$26.8 billion||1970||43 years||$1.80||3.41%|
|Essex Property Trust, Inc. (NYSE:ESS)||$14.4 billion||1994||19 years||$8.31||3.76%|
|Consolidated Edison, Inc. (NYSE:ED)||$25.6 billion||1885||45 years||$3.06||3.98%|
|The Coca-Cola Company (NYSE:KO)||$202 billion||1893||57 years||$1.64||3.47%|
|VF Corporation (NYSE:VFC)||$23.4 billion||1941||47 years||$1.92||3.18%|
|Texas Instruments, Inc. (NASDAQ:TXN)||$116.8 billion||1962||16 years||$3.60||2.82%|
|Kimberly-Clark Corporation (NYSE:KMB)||$51.8 billion||1935||45 years||$4.28||2.82%|
|Alliant Energy Corporation (NASDAQ:LNT)||$13.1 billion||1946||16 years||$1.52||2.82%|
|AFLAC, Inc. (NYSE:AFL)||$25.3 billion||1973||37 years||$1.12||3.15%|
Exchange-Traded Funds (ETFs)
Recently, ETF’s have emerged as an additional source of dividend cash flows and added the benefit of diversification.
ETFs are a relatively new investment vehicle. Since their introduction in the 1990s, ETFs have significantly gained popularity over the past few decades. Furthermore, the number of ETFs has increased more rapidly than almost any other investment type over the past two decades. For instance, the total number of available mutual funds increased by approximately 20% since 1999. However, the number of ETFs expanded more than 64-fold over the same period.
In addition to the growing volume, ETFs offer a wide selection that can be sector-specific, diversified cross-sector, high-capital gains, high dividends, etc. This variety certainly adds to the diversification of dividend investing.
The list below includes a sample of high-dividend ETFs that investors might consider as additions to their portfolio.
|Exchange-Traded Fund (ETF)||Market Capitalization||First Dividend Paid||Consecutive Dividend Hikes||Annual Dividend||Dividend Yield|
|PowerShares High Yield Equity Divid Achievers ETF (NASDAQ:PEY)||$772 million||2005||6 years||$0.77||5.29%|
|iShares Select Dividend ETF (NASDAQ:DVY)||$15.2 billion||2004||10 years||$3.59||4.32%|
|iShares U.S. Regional Banks ETF (NYSE:IAT)||$235 million||2006||9 years||$1.31||3.89%|
|PowerShares Exchange-Traded Fund Trust II (NASDAQ:KBWR)||$105 million||2011||6 years||$1.46||4.20%|
|iShares Core MSCI Europe ETF (NYSE:IEUR)||$3.4 billion||2014||5 years||$0.99||2.24%|
|WisdomTree U.S. MidCap Dividend Fund (NYSE:DON)||$2.6 billion||2006||6 years||$0.98||3.33%|
|SPDR S&P Regl Bkg ETF (NYSE:KRE)||$2.3 billion||2007||5 years||$1.39||3.70%|
More High-Yield Equity Types
In addition to MLPs and REITs, Business Development Companies (BDCs) are also pass-through entities with no corporate tax liability following a distribution of at least 90% of total earnings as dividends. BDCs generally raise funds from individual and institutional investors to offer financing and loans for mid-sized and small companies. Because of the small size and higher risk exposure from smaller companies, large banking institutions do not offer the necessary financing. However, BDCs provide the opportunity for expansion and short-term operational financing.
The equity type that offers the highest dividend yields are closed-end funds. With assets and underlying holdings actively managed by the fund’s portfolio manager, closed-end funds are intricate types of mutual funds whose shares trade on an exchange. Closed-end funds include different types, yielding an average between 6% for the foreign and debt industry and 9% for the equity industry.
High dividend yield stocks are certainly the best way to generate substantial income distributions. Most often, a high dividend yield indicates high distributions of earnings in relation to the equity’s share price. However, sudden drops or steadily declining share prices also will produce a high or rising dividend yield. Therefore, investors must consider additional equity metrics beyond a mere dividend yield. Some of the additional considerations are the total return on investment over a specific period, dividend payout ratio and a long, steady track of annual dividend hikes.
Like most investments, greater returns from higher yields come with increased risk. Therefore, high dividend stocks require more frequent monitoring than lower-yield equities with long streaks of steadily rising dividend payouts and moderate payout ratios. Since each individual investor has different goals, every investment portfolio can be different and follow a tailored investment strategy. Nevertheless, diversification will always be a good strategy.
With the techniques listed above in mind, investors should include a combination of low-risk, moderate dividend yield equities for the long run and some riskier high-dividend stocks that require frequent monitoring and adjustments in their portfolio. It is important to consider that different types of equities included in one’s portfolio account should only be a portion of the portfolio’s total assets and fit well with the overall investment goals and strategies. In addition, investors also should diversify and balance their portfolio with varied alternative-investment vehicles, such as non-dividend equities that offer high capital gains, ETFs, bonds, mutual funds, cash or commodities — including precious metals.