The 7 Biggest, Baddest Dividend Stocks Out There

Now more than ever, dividend stocks are a good play.

Why's that?

If you missed it, my colleague Morgan Housel explained earlier this month that stocks yield more than bonds.

Specifically, the average dividend yield of the Dow 30 stocks slipped past the 10-year Treasury bond yield. Historically, bonds have yielded 3.8% more than stocks since stocks also provide the prospect of capital appreciation. But with investors turning to Treasuries out of fear and the Fed working actively to keep rates low, 10-year bond rates are yielding a paltry 2.9%.

For that reason alone, investors who want the promise of a steady stream of income may want to increase the dividend-paying portions of their stock portfolios.

But I'm just getting started
Don't be fooled into thinking dividend stocks are just for those nearing retirement, though. For fans of growth stocks, a study by Robert Arnott and Clifford Asness actually links higher dividend payouts to higher earnings growth. Further, Wharton professor Jeremy Siegel has studied the dividend situation and concludes: "Through the years, diversified portfolios of stocks that pay dividends have not only beaten those that don't, but have also handily outperformed the S&P 500."

That may surprise you.

The chance for big returns isn't what many investors expect from steady dividend payers.

Here's the thing. A company, unless suicidal, won't institute a dividend unless it plans on paying it for the long term. It's signaling to the market that its operations are steady and self-sufficient enough to start returning capital to its investors. The danger to a company that lowers or suspends its dividend is frequently a violent market reaction on the down side.

From a management standpoint, paying a dividend instills discipline. When government departments get their budgets each year, there's a use-it-or-lose-it mentality. The same is true for company departments -- there's always an extra project to justify. But by taking a portion of this capital away, managers are forced to allocate their capital to their highest-priority, highest-value projects.

Where are the biggest, baddest dividend payers?
For those looking for some of these dividend plays, Standard & Poor's helps us out. Each year, they construct a list called the Dividend Aristocrats. These are "large cap, blue chip companies within the S&P 500 that have followed a policy of increasing dividends every year for at least 25 consecutive years."

Yes, you read that right. 25 years.

Only a few dozen companies make the list. Here are the seven with the highest dividend yields.

Company

Industry

Market Cap

Payout Ratio

P/E (trailing)

Dividend Yield

CenturyLink (NYSE: CTL  )

Telecom

$10.7 billion

85%

12.9

8.12%

Pitney Bowes (NYSE: PBI  )

Mail processing equipment

$5.1 billion

75%

12.4

5.93%

Cincinnati Financial (Nasdaq: CINF  )

Property casualty insurance

$4.5 billion

55%

9.8

5.64%

Integrys Energy Group (NYSE: TEG  )

Utility

$3.8 billion

127%

24.2

5.54%

Eli Lilly (NYSE: LLY  )

Pharmaceuticals

$41.1 billion

49%

8.9

5.43%

Consolidated Edison (NYSE: ED  )

Utility

$13.3 billion

66%

14.4

5.05%

Leggett & Platt (NYSE: LEG  )

Home furnishing components

$3.0 billion

83%

17.3

4.86%

Sources: Capital IQ (a division of Standard & Poor's) and Yahoo! Finance.

Does that list surprise you?

For one, you may be surprised that the dividend yields aren't in the double digits. Our dividend expert, Income Investor advisor James Early mentioned to me that he considers double-digit yields to be a warning sign for dividend unsustainability. So it makes sense that companies that have paid dividends for decades aren't quite at that level.

For another, you may not have heard of some of these companies. To be sure, familiar companies like McDonald's and ExxonMobil made the list, but their dividend yields of 3.1% and 2.9%, respectively, aren't among the top seven yielders.

It's impressive that these seven stocks top the heap, but that alone isn't a compelling reason to blindly jump into them.

Just because they've increased dividends over the past 25 years doesn't mean they can't lower or eliminate their dividends next month.

One factor to consider is their future growth prospects and any industry headwinds. CenturyLink and Pitney Bowes, for example, face tough prospects in telecom and mail services, respectively. CenturyLink has been forced to grow by acquisition; it bought Embarq last year and is in the process of merging with Qwest. Pitney Bowes is a dominant player but faces the threat of the Internet reducing mail volumes permanently.

I included their payout ratios -- the percentage of their earnings that they've paid out as dividends -- as a first step in due diligence. Ideally, you'd want to see a big dividend yield and a low payout ratio (less than 50% is preferred). At a payout ratio more than 100%, dividends are exceeding current earnings. That's the case for Integrys Energy.

Warnings out of the way, these seven companies are worth looking into to determine if their impressive dividend histories mean impressive dividend futures. Share your thoughts on them in the comments section below.

For more dividend talk, check out my response to those who think dividends are dumb by clicking here.

Anand Chokkavelu owns shares of McDonald's and ExxonMobil. The Fool has a disclosure policy.


Read/Post Comments (40) | Recommend This Article (136)

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.

  • Report this Comment On July 30, 2010, at 4:09 PM, MrMoJoeRisin wrote:

    Investing into solid dividend stocks is an excellent way to grow value. You duly note that you need to be aware of companies on the downside of the business cycle - landline telecoms especially. These will be history within a generation, kind of like black and white TVs.

    Myself, I prefer to keep a core of mid to large cap dividend paying stocks, and I grow my portfolio by trading on small cap dividend payers (shipping, REITS, BDCs). Using the proceeds to buy more large cap dividend stocks.

    The originating premise to own a share of any company is to receive a share of the profit. By and large I avoid mature companies that give you nothing in return.

    Great article.

  • Report this Comment On July 30, 2010, at 4:42 PM, CPACAPitalist wrote:

    I love investing in solid long term dividend payers. I'm only 25 but I figure these companies aren't going anywhere and its a great way to dollar cost average into positions over time. I keep the main part of my assets in solid dividend payers and they play for growth with a smaller piece of my portfolio. Great article, the value of a strong dividend can't be overstated (well maybe it can be, but its hard to do!)

  • Report this Comment On July 30, 2010, at 4:51 PM, goalie37 wrote:

    +1 rec

    @MrMoJoeRisin - I completely agree.

    The one thing missing from the article is dividend growth. A nice 3.1% dividend like McDonald's can yield much, much more down the road.

  • Report this Comment On July 30, 2010, at 5:13 PM, MonsterFluff wrote:

    how does integrys pay out 127%

  • Report this Comment On July 30, 2010, at 5:20 PM, deadbrokedad wrote:

    for those of you that are a little more active in the tracking & management of your portfolios might I suggest to you & to the author that REITS and other stocks ( though not as risky as centurylink nor a bellweather stock like eli lilly) such as WWE be included.

    cys & nly - reits both paying in the 9% range

    wwe ( yes those wrestling rascals) now paying just below 9% with great and continued growth potential.

  • Report this Comment On July 30, 2010, at 5:27 PM, DBrown7 wrote:

    Not a bad article, but I think you should look at the history of the dividend growth rate and the the payout ratio too. The stocks that you mention have nice yields, but some have anemic historic rates of growth. I think the issues raised in the above comments by goalie37 and ProfStiglitz (Kit Kat was so much easier to type) are very relevent to the discussion.

  • Report this Comment On July 30, 2010, at 5:37 PM, Puckplayr4 wrote:

    Agreed, practically 95% of my investing dollars go into dividend payers. But who else is reading this article? lol...anyway...I am in WWE, NLY, and about 20 others that I purchase monthly. I'm always looking for good dividend plays outside of the Energy, Utility, and Telecom sectors, so I will definitely check out Cincinnati Financial. I've got the steady payers in line, now I need to uncover a few growth dividend plays that I don't yet own like YUM (Great article about them pwning China here on TMF). Their Div isn't great, but I can afford to buy a few sub 5% payers.

  • Report this Comment On July 30, 2010, at 5:42 PM, TheDumbMoney wrote:

    Great article idea, not so good list, imho, even though some of these are decent ideas.

    The third key for a dividend stock is percentage growth of the dividend. So I agree with Goalie37. I'll be more specific though: take ED. Not a bad company, and yes, a dividend aristocrat. (Aside: I was a New Yorker at one point, so loved seeing those ConEd guys around tearing up my streets and two guys working while four guys ate donuts and held signs telling people in bumper-to-bumper traffic to go slow.) That's because ED often raises its dividend by half a penny a year! Gosh, I just can't tell you how excited I am about the fact that ED raised its quarterly, 58-cent 2009 dividend to 58.5 cents/quarter in 2010! That's nearly a ninth of a percent!!! Somebody, please, get me my heart medication, I'm stroking out.

    Um, I....think I'll take MCD, thank you very much, which raised its quarterly dividend ten percent from 2009 to 2010. Or WMT, which raised its quarterly dividend from 2009 to 2010 by eleven percent. They and XOM have also been raising their dividends by significant amounts for longer than just a year, though WMT is not an aristocrat. And, they have sufficient growth to do this without yet driving up their payout ratios to unsustainable levels.

    I don't want to waking the sleeping giants who will say yield on cost doesn't matter, because, because, becase.... But I think even they could agree that a 3% yield where the underlying dividend grows ten percent a year is better than a 5% yield when the dividend grows less than a percent a year. (Unless you're just planning to hold this stock for no more than a year or two.)

  • Report this Comment On July 30, 2010, at 5:48 PM, geof9324 wrote:

    As a prisoner of Quest, I would hope the merger might help my service (too much $ for too little use) and counteract the bureaucratic attitudes, but I don't see how it can help either company for long. The high payout ratio has to tell us there isn't room for any real growth here. Quest is cheap, but how is that going to help the other company? The dividend will be forced down- It is just going to delay their diminishment, even tho they are necessary utilities and under regulation.

    On the other hand, if the dividends are going to continue indefinitely, who cares about real growth?

    Well, under the Arizona Corporation Commission, I wouldn't by Quest at any price.

  • Report this Comment On July 30, 2010, at 7:10 PM, EBerg13 wrote:

    I'd invested in BP for the 8% or so divident. Silly me, but I got out early. Still think DPM (pipeline provider) is an energy player at its p/e and upwardly mobile price. Given how, though we say we need to wean ourself off fossil fuels, most stimulus funds seem to be going to highways (who manufactures those yellow barrels anyway?) pipelines will be needed for a long,long time.

  • Report this Comment On July 30, 2010, at 8:19 PM, jsv614 wrote:

    ETF - CH - Chile Fund - yield is 7.3%

  • Report this Comment On July 30, 2010, at 9:56 PM, plange01 wrote:

    dividend stocks i own..nly,cim,vz,mo,pm,kft and boeing for growth and yield..

  • Report this Comment On July 31, 2010, at 3:24 AM, dlomax77 wrote:

    @ProfStiglitz, Integrys is paying some of the dividend out of its cash reserves. There are three possibilities I can think of off the top of my head. They could have paid a special dividend, like many corporations are doing, because of next year's tax hike. They might be expecting a significant boost to their earnings in the near future. Lastly, it cold be a sign that the dividend is about to be cut. Obviously, I haven't taken the five minutes to research it, because I wanted to point out that high payout ratios may or may not be a red flag.

  • Report this Comment On July 31, 2010, at 5:49 AM, serengetty wrote:

    If you're willing to look across the pond, there are some very nice dividend yields to be found in the UK.

    http://www.FTSEdividend.com has a list of the best dividends in the FSTE 350 index. If those top dividends can be sustained... wow.

  • Report this Comment On July 31, 2010, at 1:57 PM, tomd728 wrote:

    deadbrokedad,

    NLY paying above 15 %.

    Best,

    Tom

  • Report this Comment On July 31, 2010, at 5:32 PM, sagitarius84 wrote:

    Okay here's the question: Dividend Yield or Dividend Growth?

    http://www.dividendgrowthinvestor.com/2010/07/dividend-yield...

    And that's the answer ;-)

  • Report this Comment On July 31, 2010, at 6:23 PM, TMFBomb wrote:

    Hi all,

    Thanks for the great comments so far. A number of you have mentioned dividend growth as an important consideration. Fully agreed. That ties a bit to the prospects of the company...assuming a maximized payout ratio, if we don't expect earnings to increase, then we likely don't expect the dividend to increase either.

    As for the choice of companies in my table, I merely wanted to show the highest yields in the Dividend Aristocrat stocks. These are not necessarily the best dividend stocks -- just a list of high-yielders with strong histories for further research.

    Thanks for reading and for the insights.

    -Anand

  • Report this Comment On July 31, 2010, at 8:35 PM, inestor1234 wrote:

    Someone asked about Integrys paying out 127%. It's simply not true. Check out their guidance:

    "The projected guidance range for 2010 diluted earnings per share is anticipated to be between $2.94 and $3.22"

    Their current dividend is $2.72, so even assumming they hit low guidance, it will be less than 100%.

    I thought the article was good, but obviously they didn't do simple homework.

    Very sad!

  • Report this Comment On July 31, 2010, at 10:56 PM, DownEscalator wrote:

    CINF FTW.

  • Report this Comment On August 01, 2010, at 5:42 AM, mcpudding22 wrote:

    National Grid (NGG) - projected yield 8.7% !

    http://phoenixmir2.com/NYSE

  • Report this Comment On August 01, 2010, at 6:42 PM, DynamicDividend wrote:

    Eli Lilly hasn't raised its dividend in 7 quarters...

  • Report this Comment On August 01, 2010, at 7:50 PM, TMFBomb wrote:

    @inestor1234,

    The ratio is on historical trailng earnings, not projected earnings which are merely analyst estimates.

    @ DynamicDividend,

    The list was from the most recent Dividend Aristocrats list which is only updated yearly.

    -Anand

  • Report this Comment On August 02, 2010, at 10:14 AM, BACtoBasics wrote:

    @OP

    Are we overlooking the tax hikes aimed at dividends? Couldn't this cause some serious rebalancing in invested dividend portfolios in the future, dropping prices? When your tax on Divs DOUBLES, they're only worth half as much.

  • Report this Comment On August 02, 2010, at 11:15 AM, boilerup47203 wrote:

    I'm not disagreeing with this list, but why choose LLY instead of Astra Zenaca (AZN)? AZN has a lower debt to equity ratio and a similar dividend yield. Additionally, AZN has a payout ratio of 41% vs 51% for LLY. Finally, both seem to have similar forward PE ratios. Is LLY drug pipeline better than AZN? Without knowing the business, I'm not sure why I would choose one over the other.

  • Report this Comment On August 02, 2010, at 12:35 PM, TMFBomb wrote:

    @BACtoBasics,

    It's advantageous to have your dividend payers in a tax-advantaged retirement account. In a regular account, yes, higher taxes means that dividends are less attractive than under lower taxes.

    @boilerup47203,

    Remember that I didn't pick these...these are merely the 7 Dividend Aristocrats with the highest yields.

    -Anand

  • Report this Comment On August 02, 2010, at 4:08 PM, stockmover wrote:

    geof9324 Said: Well, under the Arizona Corporation Commission, I wouldn't by Quest at any price.

    =========================================

    I strongly disagree because Q is trading around $5.67/shr this afternoon 8/2/10. The CTL merger conversion value of Q is $6.02/shr or about a 6.2% appreciation by next year not including the Q dividend of 5.6% Q is currently paying.

    For me it's a no brainer.

    Richard ..... Long Q

  • Report this Comment On August 03, 2010, at 12:35 PM, flymikefly04 wrote:

    MO (Altria) is the best out there.

  • Report this Comment On August 04, 2010, at 9:38 AM, inestor1234 wrote:

    I agree that it may be trailing, but that's the problem, looking at 2009 (a terrible year to compare) doesn't make a lot of sense.

    These aren't analyst estimates but company guidance--an that's what should be used for the calculated payout ratios. It wouldn't take long to look at 7 companies. I guess my point is someone may look at 127% and be baffled on how they could do that. Obviously that would not be sustainable. A company that has raised their dividends for the last 50 years could not afford to pay such rich dividends.

    That's all i'm saying. It was a good article just distorts the facts a little.

  • Report this Comment On August 06, 2010, at 11:25 AM, scanlin wrote:

    From the list of 7 there are a few good buy-write opportunities.

    (1) Buy PBI at 20.49 and sell an Aug 20 call for .55. You also get the 37 cent div that goes ex-div Aug 11. If called at expiration you make 51% annualized.

    (2) Buy LLY at 36.51 and sell Aug 36 for .61. You get the 49 cent div (ex-div Aug 11) for an if-called return of 39%.

    (3) Buy LEG at 20.94 and sell the Aug 20 for 1.05. Annualized return if flat is 46%.

    MikeS

    http://www.borntosell.com

    covered call investment tools

  • Report this Comment On August 06, 2010, at 12:27 PM, belate wrote:

    "when your tax on dividends doubles, they're only worth half as much". Wow, that's some really good math. I've got the right strategy. I'll strive to make less to bring my tax liability down. Eventually I'll pare all the way down to no gain at all and my taxes will be the lowest they can be. Yup, that's my plan. I'll show those turds in WashDC. They won't get a thing from me.

  • Report this Comment On August 06, 2010, at 1:26 PM, MBRECRUITER wrote:

    CTL looks like a real risky play when you look at the past twelve month' highs and lows(currently trading just off the highs and has been flatlined for 24 months. Go back and look at historical pricing on just dividend payout and you will see why - it jumped a 10 bagger in dividend payout in sept. 2008. If you bought it at the low in the 14s in the past 12 months - CONGRATULATIONS!, you dividend grabbing GURU. If you didnt and want consistent, reliable dividend payout and an oppty for equity appreciation, look at BTO, EVV, HPI, MO, XOM and even BP (the oil is gone-hahhah!, the well is permanently capped, hopefully and there is still $15B of reserve left for cleanup that may not be used and will be released from being on hold)

  • Report this Comment On August 06, 2010, at 1:33 PM, Shykrull wrote:

    Why are the MLP's (master limited partnerships) never mentioned in these dividend articles? I own units of Genesis Energy (GEL) and have for just over one year. During that period, I have yielded 10.2% in dividends (they call them distributions) and the share price is up 41%. Even without the capital appreciation, 10.2% annual ROI sounds pretty darn good to me. These entities, BY LAW, must pass on the majority of their earnings. I don't understand why their is never any mention of them in these dividend articles. Also, they have raised the dividend an average of 9% per year with a increase in each of the last 20 quarters.

    foolishly yours,

  • Report this Comment On August 06, 2010, at 2:13 PM, kfivefive wrote:

    The fool has a chart awhile back showing the annual gains of dividend paying stocks verus non-dividend payers. Dividend payors outperformed non payers just about every year from 1970 to 2005. Dividend payors = 10.19% versus non payers 4.39% over that timeframe. I have become a big dividend payor investor as a result of seeing that graphic.

    http://g.fool.com/art/shop/newsletters/08/graph08-div_small....

  • Report this Comment On August 06, 2010, at 3:36 PM, JoeBivens wrote:

    Isn't VZ at 7%?

  • Report this Comment On August 06, 2010, at 3:59 PM, EASYMONEY00 wrote:

    One that i think should be listed is Verizon (VZ).

    It's has paid a great dividend for years. Now paying 6.4%.

  • Report this Comment On August 08, 2010, at 4:46 PM, TMFBomb wrote:

    @inestor1234,

    Agreed that looking at the implied future dividend payouts is a good next step in the diligence process.

    @Shykrull,

    My fellow Fools and I do write about MLP's in dividend articles. Here's an article I wrote that talks a bit about Linn Energy:

    http://www.fool.com/investing/general/2010/08/03/3-dividend-...

    My colleague James Early wrote this one recently:

    http://www.fool.com/investing/dividends-income/2010/07/22/3-...

    @JoeBivens and EASYMONEY00,

    Verizon wasn't part of the Dividend Aristocrats list, so it didn't make the top 7. It's a stock on my personal watchlist, though.

    Fool on,

    Anand

  • Report this Comment On August 08, 2010, at 4:49 PM, TMFBomb wrote:

    Oops...meant to say that Linn Energy is similar to a master limited partnership (MLP).

    Here's one that talks about MLP's Kinder Morgan Energy Partners and Enterprise Products:

    http://www.fool.com/investing/general/2010/07/30/4-stocks-to...

    -Anand

  • Report this Comment On August 09, 2010, at 12:33 AM, MBLacey wrote:

    Just a small correction to a previous comment. WMT IS an Aristocrat, according to http://www.buyupside.com/dividends/aristocratstovaultjan09.p.... Its dividend is not up there with the seven, but it has raised the dividend for 35 straight years.

    Also, the Aristocrats list consists only of S&P 500 companies - all Aristocrats on the list are American companies - that is why no AZN

    And there are no REITS or MLPs in the S & P 500, either - only common stocks.

  • Report this Comment On August 09, 2010, at 12:51 AM, MBLacey wrote:

    One thing also that might be valuable in checking the safety of the dividend is the cash flow statement. According to that the payout ratio of Dividend to Free Cash Flow for CTL goes down to about 66%, and PBI goes to about 50%. Neither of these are terrific, but slightly less risky than Dividend to Earnings.

  • Report this Comment On January 03, 2011, at 10:56 AM, Classof1964 wrote:

    Besides current annual income, for buy and hold investors, reliable and growing dividends reduce risk and increase total return significantly, as studies of dividends since the 1920s show. BUT the dividends have to be reinvested regularly in the payer's stock to capture the total returns the studies suggest. This method is a form of dollar cost averaging that can have significant cumulative results.

    For good dividends payers over time the income generated (whether or not reinvested) can be considerable. I owned what was American Home Products, which became Wyeth (then Pfizer)since 1973. Over the 37 years I collected $35,114 in dividends on my investment of $4,171. It didn't hurt that the drug industry has generated a number of very profitable companies over these years.

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