Lock In These High Yields Today

The stock market sometimes leaves you little to hang on to. It may go up; it may go down. You're at its mercy, right?

Not exactly. If you invest in healthy, dividend-paying companies, you can rely on regular payments no matter what the overall market does. Today, thanks to all this volatility, it's easy to find high yields -- and by buying now, you're almost assured of locking them in for the long term.

Find high yields in the haystack
Yahoo! offers a stock screener to help you find companies that fit your criteria. For example, you could screen for companies in the S&P 500 with dividend yields of 3% or higher. You can refine the screen further for companies with, say, five-year earnings growth rates of 10% or more, and perhaps P/E ratios below 20. After all, your goal is to find hefty dividend payers that are healthy, growing, and reasonably priced.

You'll be left with companies like these:

Company

Recent Dividend Yield

AT&T (NYSE: T  )

4.2%

Dow Chemical (NYSE: DOW  )

4.6%

General Electric (NYSE: GE  )

3.4%

Home Depot (NYSE: HD  )

3.2%

Harley-Davidson (NYSE: HOG  )

3.2%

To maximize your chances of maximizing your dollars, you should follow any screen results with dedicated research. Scrutinize each company's competitive position. Review sales and earnings growth. Get a feel for management. Find out whether profit margins and debt levels are growing or shrinking. Check out the dividend itself and find out how often and how significantly it's been increased over time.

Be especially wary today of financial companies. Many have been forced to cut their dividends recently because of liquidity constraints.

Locking it in
While nothing in life is absolute, healthy and reliable companies give you opportunities to lock in income with annual dividends. Dow Chemical, for example, has paid a dividend for 386 consecutive quarters, increasing it regularly. General Electric has increased its dividend by an average annual rate of 13% over the past 20 years.

If you buy shares of Home Depot for $28 each with a 3.2% dividend yield, you can expect annual dividend payments of $0.90. As long as the company remains healthy and growing, even if the stock price slumps to $24 and stays down for several years, you'll still receive your $0.90 per share each year.

Better yet, over time, that dividend will likely go up, too, as the company grows its profits or decides to stop growing and return more cash to shareholders. So you've essentially locked in a certain return on your initial investment, and unlike with a savings bond, you can expect that return to grow.  

When it doesn't work
Of course, as I warned above, not every steep dividend yield can be locked in. Companies that are ailing or have lots of debt sometimes reduce or eliminate their dividends. In the wake of the subprime lending crisis, for example, companies such as Citigroup and Washington Mutual (NYSE: WM  ) reduced their dividends considerably to sustain some financial flexibility. Meanwhile, Ford (NYSE: F  ) , after reducing its dividend, is now eliminating it to better handle competition and its debt load.

Diligent research into payout ratios -- the percentage of net income or free cash flow a company pays out to shareholders as a dividend -- can help turn up dividend payers you might want to avoid. If, for example, Home Surgery Kits (ticker: OUCHH) pays $1 per year in dividends and sports earnings per share (EPS) of $4, its payout ratio is a reasonable 25%. ($1 divided by $4 equals 0.25, or 25%.) If it pays $1 per year and is earning $0.80 per share per year, its payout ratio is a dangerous 125% (you can't pay more than you earn for very long).

The timing is right
If it makes sense for your portfolio, go ahead and seek hefty dividend payers. You can lock in some historically high yields at some historically solid companies today.

If you'd like some help identifying the most promising dividend payers out there, consider test-driving our Motley Fool Income Investor investing service.

The picks are beating the market by more than 7 percentage points and offer a greater than 4% yield on average. A 30-day free trial will give you access to all past issues and the team's top picks for new money now.

Longtime Fool contributor Selena Maranjian owns shares of General Electric and Home Depot. Home Depot is a Motley Fool Inside Value recommendation. Dow Chemical and Washington Mutual are Motley Fool Income Investor recommendations. The Motley Fool is Fools writing for Fools.


Read/Post Comments (0) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 612502, ~/Articles/ArticleHandler.aspx, 10/25/2014 10:23:16 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 16,805.41 127.51 0.76%
S&P 500 1,964.58 13.76 0.71%
NASD 4,483.72 30.92 0.69%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/24/2014 4:06 PM
DOW $48.21 Up +0.53 +1.11%
The Dow Chemical C… CAPS Rating: ****
F $13.78 Down -0.62 -4.31%
Ford CAPS Rating: ****
GE $25.64 Up +0.20 +0.79%
General Electric C… CAPS Rating: ****
HD $94.99 Up +0.19 +0.20%
Home Depot CAPS Rating: ***
HOG $63.35 Up +0.34 +0.54%
Harley-Davidson, I… CAPS Rating: ***
T $33.87 Up +0.21 +0.62%
AT&T CAPS Rating: ***
WAMUQ.DL $0.00 Down +0.00 +0.00%
Washington Mutual,… CAPS Rating: No stars

Advertisement