How to Get Truly Huge Yields

With interest rates and bond yields at extremely low levels, many investors are chasing the high yields offered by a number of risky dividend-paying stocks. But buying companies simply because of the size of the dividend isn't something more conservative investors should be doing. If a 10% to 15% yield is what you are looking for, you may not have to search as far as you think.

What's your real yield?
When you look at the performance of your portfolio, the return on investment is based off the price you paid for different stocks. So why don't we follow the same logic when looking at dividend yields of stocks? I'd say that when you own a stock and it pays a dividend, you shouldn't care about its current yield; instead, you should focus on the current dividend compared to the price you paid for the stock.

For example, say you had bought the following four companies 10 years ago for your portfolio:

Company

April 2002
Share Price

Recent Share Price

Current Annual Dividend per Share

Yield Based on 2002 Price

McDonald's (NYSE: MCD  ) $27.71 $97.29 $2.80 10.1%
Chevron (NYSE: CVX  ) $43.23 $105.75 $3.24 7.5%
Nucor (NYSE: NUE  ) $16.25 $39.22 $1.46 9%
HCP (NYSE: HCP  ) $21.55 $41.36 $2.00 9.3%

Source: Yahoo Finance; author's calculations. 2002 prices adjusted for splits.

Over the years, rising dividends have increased the stocks' dividend yields when you compare them to their original share prices. Now, McDonald's pays 10% of your purchase price annually in dividends, and the others are getting close to double-digit percentage payouts.

Sometimes this works even better with growth companies that don't even pay dividends at the time you buy them. For instance, if you had bought Apple 10 years ago, you would have paid less than $13 per split-adjusted share. With Apple's new dividend of $2.65 per quarter, you'll have your entire initial investment paid back to you in the first five quarters.

Still worth buying?
As you can see, these five companies would all have made wonderful buys 10 years ago, but the real question is, "Are they still worth buying today?" I believe they are. Other than Apple, these companies have all boosted their annual dividend payouts every year for 25 years or more. But more importantly, each of these companies has specifics that make it worth buying.

McDonald's is the clear-cut leader in the fast-food business, with No. 1 market share in nearly all of the countries in which it does business. The Golden Arches saw same-store sales increase 7.3% in the most recent quarter. Its growth continues to impress.

Chevron may be in second place behind Exxon in terms of market cap among U.S. oil companies, but Chevron's dividend yield is significantly higher than Exxon's, even after both of them raised their payouts recently. Chevron also has a cheaper valuation than Exxon based on earnings.

Nucor bears the title of North America's largest recycler, with steel production and scrap-metals brokerage among its businesses. The company's modern and efficient "mini-mills" format helps save the company on costs, helping it stand out from many of its peers.

HCP currently boasts a portfolio of over 1,000 health-care facilities, and with an aging U.S. population, future revenue should remain fairly consistent. The company gets the majority of its revenue from senior housing and skilled-nursing properties, and a big portion of its sales comes from private-pay patients, rather than government reimbursements, helping shelter it from health care reform effects.

Last but not least, while most investors talk about Apple's future growth prospects, I believe you should buy it for the dividend. Based on first-quarter earnings per share, Apple's dividend payout ratio will be around 21%. If Apple continues to grow rapidly, and management wants to keep the payout ratio around 20% to 25%, the dividend will also continue to rapidly increase. If growth slows down to a normal pace, the board still has plenty of room to increase the dividend, as the payout ratio is low (not to mention Apple's $110 billion in cash sitting in the bank.)

Foolish take
Regardless of a company's dividend yield today, long-term buy-and-hold investing in financially solid companies can turn modest payouts into cash cows over time. Start building a portfolio today that will be producing yields of 10% or more in the future by getting this Motley Fool special report on safe, dividend-paying companies. Just click here.

Fool contributor Matt Thalman owns shares of Apple. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Chevron, Nucor, McDonald's, and Apple, as well as creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (9) | Recommend This Article (55)

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 April 27, 2012, at 5:51 PM, mrmolar119 wrote:

    The premise is correct but you have to have bought and held these stocks for 10.years.

    This is a great idea if you are a ways from retirement. But if you need the income in the near future.

    I think a much better investment is AWF and reinvest the dividends.

    mrmolar119

  • Report this Comment On April 27, 2012, at 6:02 PM, Howard1ii wrote:

    Assuming you are re-investing dividends, I think the total return is a better measurement.

  • Report this Comment On April 27, 2012, at 8:14 PM, Gailen wrote:

    The following comment is truly foolish:

    "I'd say that when you own a stock and it pays a dividend, you shouldn't care about its current yield; instead, you should focus on the current dividend compared to the price you paid for the stock."

    You can't go back in time and buy at that price, but you could sell it at its current price and reinvest in a different stock. Comparing the yield on the new stock to the yield on the old stock at its old price makes no sense. If dividends are what you seek, this advice is just plain foolish.

  • Report this Comment On April 27, 2012, at 9:18 PM, EASYMONEY00 wrote:

    High rated preferred under or near the call price is the way to go for good solid income.

  • Report this Comment On April 28, 2012, at 7:37 AM, Caroclara wrote:

    Is the Mad Cow scare going to effect MCD?

  • Report this Comment On April 28, 2012, at 10:16 AM, snickerdoodle9 wrote:

    I am a retiree currently holding 10 high yield dividend ( 4% and higher ) and 6 corporate bond/blue chip companies . When the dividends payout I reinvest them . Because of the income that I am currently receiving from my pension and Social Security , I will not need the income until another 7 years when Uncle Sam starts coming after his cut . With the kind of yield that will generate over less than 10 years , 15% and beyond will be sweet . At this point , I sleep worry and stress free ;-) !

  • Report this Comment On April 30, 2012, at 4:20 PM, COS911 wrote:

    This is the most FOOLISH article I have seen on this site! When comparing returns you don't compare based on what you paid, rather what they are currently worth. The current dividend return has to be what you compare to alternate investments to make a rational choice going forward. If your $100 in MCD can be exchanged for another stock paying a 4% dividend (assuming other factors are equal of course) then it would be foolish to think that you should keep the MCD because it is "paying" you 10%! This entire article should be redacted.

  • Report this Comment On May 06, 2012, at 2:26 PM, crca99 wrote:

    Articles' logic seems ok to me. My dividend on QSII is greater than advertised because my cost is less than advertised. However, stock price has begun to deteriorate. That may cause me to look elsewhere for dividend and stock price growth.

  • Report this Comment On May 14, 2012, at 4:39 PM, Classof1964 wrote:

    The people who argue that you do not compare the original price paid to determine your dividend rate are assuming that you are not a buy and hold investor. If I buy 100 shares of an equity that raises its dividend over the years held and I have no interest in selling it to allocate the principal elsewhere, my total return would have to consider all the dividends and capital gains based on the initial price paid. But it that price were constant, an increasing dividend would only increase the dividend rate and the total return.

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