Yields Too Good to Be True

Most investors seem to appreciate the value of dividends. No matter what the market is doing or what your stock is doing, as long as it's healthy, it's likely to keep paying you its dividend. The stock price might stagnate for five years, but during that time, you'll still receive quarterly dividend payments. Nice, eh?

As my colleague Rich Greifner has pointed out, a whopping 41% of the S&P 500's total return from 1926 to 2004 came from dividends. Therefore, it can seem logical to seek out companies with steep dividend yields. I found these among the S&P 500:

Company

Recent dividend yield

Bank of America (NYSE: BAC  )

12.7%

Wachovia (NYSE: WB  )

15.2%

Gannett (NYSE: GCI  )

9.1%

Qwest Communications (NYSE: Q  )

8.7%

Pfizer (NYSE: PFE  )

7.3%

Newell Rubbermaid (NYSE: NWL  )

5.4%

Source: MSN Money.

Be careful when looking at such lists, though; don't just jump at the biggest yields you see. The banks above, for example, are in a struggling industry, weighed down by our nation's mortgage mess. Many banks, such as Washington Mutual (NYSE: WM  ) , have cut their dividends, and there's speculation that Wachovia might follow suit, perhaps eliminating its dividend entirely.

Newspapers, too, such as those owned by Gannett (The Arizona Republic, The Cincinnati Enquirer, and The Tallahassee Democrat, among many others), face a challenging environment. Newell Rubbermaid might look less attractive on a yield basis, but you should never focus solely on one or a few metrics. Its operating and net income levels have been rising over the past few years, whereas that hasn't been the case with many bank stocks.

What to do
When you approach dividends, do so with a level head. Look for sustainable payout ratios. Look for sustainable competitive advantages. Look for growth.

Pfizer, Newell Rubbermaid, and Bank of America are recommendations of the Motley Fool Income Investor newsletter. If you'd like to see some more recommendations of promising dividend payers, take a free trial for 30 days with no obligation.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Pfizer is a Motley Fool Inside Value recommendation. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.


Read/Post Comments (0) | Recommend This Article (8)

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.

DocumentId: 685905, ~/Articles/ArticleHandler.aspx, 7/28/2014 5:41:09 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...


Advertisement