Top-Yielding Stocks (You Might Actually Want to Buy)

The power of dividend investing is pretty well-known these days. Higher-yielding stocks tend to offer higher returns over time than low- or no-yield stocks, according to research from Jeremy Siegel and others. In fact, the 20 best-performing survivor stocks from the original S&P 500 in 1957 are all dividend payers.

What's more, reinvesting dividends acts as a "bear-market protector and return accelerator," according to Siegel. The extra shares purchased and accumulated at higher dividend yields during down periods act as a protector in falling markets, and these extra shares rising in value turn into a "return accelerator" when prices rise.

As the recent economic crisis illustrated all too well, however, you can't buy just any high-yielding stock. Dividends that are cut or suspended entirely can wreak havoc on a stock price -- and thus your portfolio.

Fortunately, there are steps you can take to lessen your chances of buying one of these train wrecks. James Early, advisor of our Motley Fool Income Investor service, suggests looking at the payout ratio, for starters. That's simply the percentage of a company's net income used to pay its dividend. Obviously, the higher the payout ratio, the tougher it is for a company to meet its dividend obligation. James looks for a payout ratio less than 80% for safer companies, and a sub-60% or even sub-50% payout for companies you consider risky.

To further stack the odds on your side, you can limit your search to companies that have grown their dividend over the past three years or so. That eliminates the less stable or erratic dividend payers.

I constructed a screen to find some promising high-yield, low-risk companies for further research, and I'm presenting it to you weekly. I made sure the stocks met the following criteria:

  • Market cap > $1 billion
  • Payout ratio < 60%
  • Three-year dividend growth > 0%

Here are the top 10 highest yielders the screen produced:                                                               

Company

Market Cap
(in millions)

Payout Ratio

3-Year Cumulative
Dividend Growth

Dividend Yield

Alliance Resource Partners (Nasdaq: ARLP  )

$1,948

50%

47%

6.1%

Mercury General (NYSE: MCY  )

$2,130

48%

18%

6.1%

Magellan Midstream Partners (NYSE: MMP  )

$5,518

58%

18%

6%

Cincinnati Financial (Nasdaq: CINF  )

$4,365

49%

15%

6%

Eli Lilly (NYSE: LLY  )

$39,530

48%

19%

5.7%

Exelon (NYSE: EXC  )

$26,810

55%

25%

5.2%

Hudson City Bancorp (Nasdaq: HCBK  )

$6,167

52%

94%

5.1%

CMS Energy (NYSE: MS  )

$3,922

55%

450%

4.9%

Bristol-Myers Squibb (NYSE: BMY  )

$44,689

22%

13%

4.9%

Unisource Energy (NYSE: UNS  )

$1,163

43%

56%

4.9%

Source: Capital IQ, a division of Standard & Poor's.

These stocks are great places to start your research, but they're not formal recommendations.

What this means
Siegel sums it up nicely in his book, The Future for Investors: "Bear markets are not only painful episodes that investors must endure, but also an integral reason why investors who reinvest dividends experience sharply higher returns."

Whether bear or bull market, there's a reason why the top-performing stocks over the decades are all dividend payers. If you're lacking that type of exposure in your portfolio, you should take the first steps now toward finding stable dividend payers designed to weather any market cycle.

Fool analyst Rex Moore really likes your peaches, wants to shake your tree. Alliance Resource Partners and Magellan Midstream Partners are Motley Fool Income Investor selections. The Fool owns shares of Exelon, which is a Motley Fool Inside Value pick. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (13)

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: 1276656, ~/Articles/ArticleHandler.aspx, 9/30/2014 10:24:33 AM

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