Where You Can Find the Best Dividends

Now if you ask me, I might say that right now smart investors are looking at dividend stocks. But that implies that other investors aren't smart, and I don't want to do that.

What I will say, though, is that if you're not already sniffing around dividend-paying stocks, then it's high time you started. The "why" is pretty simple:

  • You can score a better yield from many dividend-paying stocks than you can from Treasury bonds.
  • Dividend stocks have shown an ability to perform even when the rest of the market is ugly.
  • When a strong company kicks out dividend checks, you get paid no matter what the market is doing.

I could keep going, but that's a good start.

Yay dividends! Now what?
Now we have to track down dividend stocks worth owning. Looking at individual stocks one at a time is certainly a possibility, but it can also be very time-consuming considering the sheer number of dividend-paying stocks out there. So what I've done is break up the dividend-paying stocks in the S&P 500 by industry so we can try to narrow down the industries where we may have the best luck.

Right off the top, if you're looking for sheer number of companies to choose from, you'll want to turn to the capital goods, energy, and utilities industries. Nearly one-fifth of the S&P 500 is made up of dividend-paying stocks in those sectors. But that's a pretty weak way to go, so let's move on.

Yield
This is probably the most popular way to look at dividend stocks. If we're looking at stocks because of their payouts, let's look at the ones with the highest payouts. That makes sense, right?

Kind of. A hefty dividend yield has made stocks like Annaly Capital Management (NYSE: NLY  ) quite popular among investors. I'm not one of those investors -- in fact, I really don't like the stock or the company very much at all. With Annaly, like other very-high-yielders, you give up stability and reliability in favor of big quarterly checks.

"But," some of you are no doubt saying, "I'm totally cool with that trade-off." Well if that's the case, then here are the industries that will yield (pun intended) the most for you.

Industry

Average Dividend Yield

Average Payout Ratio

Telecommunication Services

7.3%

232%

Utilities

4.5%

66%

Real Estate

3.5%

166%

Pharmaceuticals, Biotechnology, and Life Sciences

3.4%

37%

Food, Beverage, and Tobacco

3.1%

45%

Source: Capital IQ, a Standard & Poor's company, and author's calculations.

Growth
If you care less about what you're getting paid today and more about what your investment will be kicking out a few -- or many -- years down the road, then growth may be more of a concern. Here are the industries that may wow you with their payout hikes.

Industry

Average Three-Year Dividend Growth

Average Yield

Telecommunication Services

27%

7.3%

Software and Services

26%

1.7%

Healthcare Equipment and Services

21%

1.4%

Semiconductors and Semiconductor Equipment

20%

2.8%

Transportation

13%

1.6%

Source: Capital IQ, a Standard & Poor's company, and author's calculations.

Now before you get too excited about the fact that telecom topped both our yield and growth list, I should note that it's a small sector with only six companies, and one company -- CenturyLink (NYSE: CTL  ) -- significantly skewed the results.

CenturyLink has grown its dividend tremendously over the past few years, but the recent increases have brought its payout ratio to a level that will make heady growth more difficult. And the company's merger with Qwest (NYSE: Q  ) could also throw a monkey wrench in dividend growth plans.

Bringing it together
What I prefer, though, is to look for a balance of the various factors we've looked at here. So to finish, I highlighted only the industries that had an average dividend yield above 2.5%, a payout ratio below 80%, and average three-year dividend growth above 5%.

Industry

Average Yield

Average Three-Year Dividend Growth

Average Payout Ratio

Commercial and Professional Services

3.0%

8%

79%

Food, Beverage, and Tobacco

3.1%

7%

45%

Household and Personal Products

2.9%

10%

44%

Semiconductor and Semiconductor Services

2.8%

20%

40%

Utilities

4.5%

6%

66%

Source: Capital IQ, a Standard & Poor's company, and author's calculations.

I'm not going to go so far as to say that investors shouldn't look outside these sectors -- I think keeping a diversified portfolio is very important. But right now I think these are the best places to start when you're looking for dividend stocks.

Waste Management (NYSE: WM  ) is in the commercial and professional services group. As a national waste collector and recycler, Waste Management has a business that investors can count on and its current 3.7% yield is certainly eye-catching. Fan favorite Altria (NYSE: MO  ) is among the food, beverage, and tobacco names. Not everyone is comfortable investing in tobacco companies, but for those who are, the power of the Marlboro brand means Altria's 6.4% yield is rock solid.

Household and personal products contains brand-powered mainstays like dividend aristocrat Clorox -- a stock that I think has a pretty attractive valuation. You can find a whole mess of dependable payers among the utilities, but Consolidated Edison (NYSE: ED  ) may be a particular standout because it's another dividend aristocrat and pays out 5%.

And in case you're wondering, I skipped over semiconductors on purpose so we can finish with one of my very favorite dividend stocks, Intel (Nasdaq: INTC  ) . I'm admittedly still scratching my head over its purchase of McAfee, but the company pays an attractive 3.5% and -- assuming large, strange acquisitions don't become the norm -- has plenty of cash rolling in to allow future dividend hikes.

I am hot on dividend stocks, but I've got a wary eye on these stocks.

Intel and Waste Management are Motley Fool Inside Value selections. Clorox and Waste Management are Motley Fool Income Investor recommendations. Motley Fool Options has recommended buying calls on Intel. The Fool owns shares of Altria Group, Annaly Capital Management, and Intel. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Matt Koppenheffer owns shares of Intel, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his Motley Fool CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool’s disclosure policy assures you no Wookies were harmed in the making of this article.


Read/Post Comments (19) | Recommend This Article (72)

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 September 15, 2010, at 6:43 PM, art1026 wrote:

    From DustinRodes

    How come the pipeling general partnerships are not mentioned in the dividend scene? Answer Please.

  • Report this Comment On September 15, 2010, at 7:11 PM, TMFKopp wrote:

    @art1026

    Thanks for the comment!

    Limited partnerships and master limited partnerships (which would capture stocks like Kinder Morgan) are ineligible for S&P 500 inclusion. So that would keep them out of the analysis above.

    There are some pipeline companies included in the S&P -- Spectra and El Paso for example -- and those are captured in the Energy industry.

    Matt

  • Report this Comment On September 15, 2010, at 8:14 PM, scanlin wrote:

    There's a pretty easy way to add 4-6% per year to whatever dividend paying stocks you own: Write out-of-the-money calls against them. Yes, you put a cap on your upside, but the extra income could make it a good trade off.

    For example, with WM at 34.53 you can sell an Oct 35 strike for 40 cents (maybe split the bid/ask and get 45 cents). If called you make the 40 cents plus 47 cents of capital appreciation, for a total of 87 cents in 31 days (2.5%, or 29.6% annualized). If WM stays below 35 by Oct 16 then you keep the 40 cents and can do it again for the Nov cycle (although there is an earnings announcement on Oct 28 to watch out for).

    MikeS

    http://www.borntosell.com

  • Report this Comment On September 15, 2010, at 8:37 PM, TMFKopp wrote:

    @scanlin

    A couple thoughts, and do feel free to correct me, I don't really mess around much with options.

    First of all, I'm hesitant to sign on for the simplicity and low risk of writing calls like that. Options are priced based partially on the stock's volatility which, of course, means that they're priced based on the probability that they'll pay off for the person who's buying your call.

    So I think that a view towards historical versus current versus expected future volatility needs to be taken into account. If the price does spike and the stock gets called away, it's harder to get upset about having a capped gain versus a loss, but you cap the upside on enough of your stocks and you've really handicapped your portfolio.

    I think it was Lynch who talked about a few of your stocks doing really well, a bunch being mediocre, and a few doing poorly, and it being difficult to know exactly which would be which. I agree with that and I want to get the most out of the stocks that have any potential to run (which I like to think are all of the stocks I buy!).

    Not that you ignored that -- you mentioned that the upcoming earnings call could increase the volatility. I just wanted to highlight that point.

    The other issue with that is simply a one of portfolio size / diversity. As far as I know, to really do that strategy you would need to own 100 shares of WM. For many folks a $3,400 investment in WM may fit into a well diversified portfolio, but for many that may not be possible.

    Matt

  • Report this Comment On September 15, 2010, at 9:18 PM, ChrisFs wrote:

    A dividend stock with surprisingly good fundamentals is WWE, World Wide Wrestling.

  • Report this Comment On September 15, 2010, at 9:48 PM, TMFKopp wrote:

    @ChrisFs

    Thanks for the comment!

    Interesting call. Want to provide some more color on why you like WWE so much?

    Matt

  • Report this Comment On September 15, 2010, at 10:24 PM, slash32is4 wrote:

    T

  • Report this Comment On September 15, 2010, at 10:53 PM, mikecart1 wrote:

    WWE rules because the salaries are very much in control by management - unlike sports where the players run the show and can leverage their salaries, with wrestling there are just 2 teams that are career worthy: TNA and WWE.

    If you don't like your salary, you can leave because someone can always replace you. This is why WWE will always be profitable in the near and medium future. If attendance drops, players (wrestlers) can be dropped as well. That is why WWE is such a great company revenue-wise. That is why mikecart1 owns WWE! :D

  • Report this Comment On September 15, 2010, at 11:10 PM, dbman5 wrote:

    Nice review but doesn't the high leverage of Clorox bother you? Not only is it high, it's also over 2-1/2 times higher than it's industry average. In fact, it's over 3 times higher than anything else on my current list of 144 potential dividend stocks.

    Maybe I'm missing something but that along with a low current ratio scares me off. I don't expect them to go bankrupt anytime soon but it does make me worry about the future of the stock price.

  • Report this Comment On September 16, 2010, at 1:02 AM, TMFKopp wrote:

    @dbman5

    It's not the most conservative balance sheet, I'll give you that. I never take leverage lightly, but it's a bit different with a stable company with Clorox than a company with a riskier underlying business. And while balance sheet metrics look awful, EBITDA/interest coverage is perfectly fine at 9.3x and free cash flow is very attractive.

    In 2008 the company took on a bunch of new debt thanks to acquisitions and share buybacks. Since then, debt has come down considerably -- by around $700 million.

    The debt makes Clorox a considerably riskier proposition, but I wouldn't currently put it in the too-risky-to-own category.

    What might change that? Interest rates are very low right now. If rates start climbing and the company doesn't substantially lower its debt then it could be a different picture.

    Matt

  • Report this Comment On September 16, 2010, at 8:24 AM, ferguson46 wrote:

    How about CVB Financial (CVBF)? It's currently sporting a 4.7% dividend yield.

    Will

    S&P 500 Dividend Aristocrats highest dividend stocks: http://www.dividend.co.nr

  • Report this Comment On September 16, 2010, at 8:39 AM, energysystems wrote:

    VOD is a well known telecom, but what interests me most about it(I am long VOD), it has no landlines, and it's payout ratio is 52%. Low p/e, solid dividend yield that's continuing to grow, and one of the worlds largest mobile providers(while also owning 45% of Verizon Wireless).

  • Report this Comment On September 16, 2010, at 2:40 PM, mobil4 wrote:

    When will Motley Fool start recommending stocks that pay a rate of return better than 1to3%. BDC stocks are paying better than 7to8%.REIT'S are another brand of stock with better than 1 to2%. Gas transmission stocks are also paying a much better rate of return.

    Mobil4

  • Report this Comment On September 17, 2010, at 4:53 PM, TMFKopp wrote:

    @mobil4

    I would hardly say that The Fool has avoided talking about higher yielding stocks. The company owns shares of Annaly Capital (http://www.fool.com/investing/dividends-income/2010/08/10/to..., which yields over 15%.

    I just talked a bit about high yielding stocks in general the other day: http://www.fool.com/investing/general/2010/09/16/should-you-....

    Matt

  • Report this Comment On September 17, 2010, at 5:54 PM, drborst wrote:

    I like Intel with the dividend, but lately I've started looking at Cisco. First, they know how to do aquisitions. Second, they recently suggested that 2011 might be a good year to start paying a dividend.

    I'm curious what your thoughts are on what that stock will do when they start paying out their mountian of cash. Will Wall Street see it as Cisco can't figure out how to use the money and beat up the stock, or will retirees looking for income push it higher?

  • Report this Comment On September 17, 2010, at 6:20 PM, TMFKopp wrote:

    @drborst

    I've actually been a Cisco fan for a while (http://www.fool.com/investing/value/2007/03/19/the-ultimate-.... And a few months ago I was talking about the potential of a Cisco dividend (http://www.fool.com/investing/general/2010/06/24/rank-these-.... Well, at least I was talking about Chambers talking about a Cisco dividend...

    In any case, I really like the fact that Cisco is now paying its shareholders and that makes the stock a serious investment consideration for me. I have to admit I am surprised at how quickly it happened though.

    As for how the stock will react... well, that can be tough to predict. Some growth investors may be turned off by the dividend and while some income investors may jump at it, the yield may not make it too interesting to too many. Meanwhile, mutual fund managers of various flavors will have to buy or sell the stock simply based on some arbitrary "classification." It could gain a little, lose a little, or stay put. Isn't that helpful? :)

    As with Oracle, I think I'm going to keep my eye on it and see how management approaches the dividend. Ie, do they think they can just put out a small payout and leave it like that indefinitely? Do they want to grow the payout quickly? Do they want to have slow, steady growth that it will be able to consistently keep up with?

    Matt

  • Report this Comment On September 19, 2010, at 4:28 PM, busterbuddy wrote:

    For dividends do what you want but here are my picks. MO, T, SO, Bristol meyers, EEP, SBR, HGT, ETP, O, PGF.

  • Report this Comment On September 20, 2010, at 5:14 AM, TimoDOZ wrote:

    Welll the Fool not having one Single comprehensive financial advisory publication is also blind as to the "foreign" seiocks, that is until they list on the NYSE and then they are happy fools to cover them . that is once that undiscovered country is already discovered. So now the Fool will "let" you folow AT and SDRL. And they are still not bad dividend picks. Most Canadian stocks of course have the advantage of being levered to the hard currency that is backed by the comodities' economy currency. Your Norwegos are of the same nature and the Nor/Kroner is a good one. Besides the SDRL there is also the STO. also the good div but only paid anually so there is also dividend capture strategy opportunities there. If the Fool were allowed to follow along I would mention the next time you are trying to find toilet paper for less than 50 cents a roll to consider some CFPUF witht he effective 15% yield. CV 1/1/11. A ATGFF which yields 5.7% plus the tax credit for the 15% tax with holdings. If held in a tax sheltered account you would eventually get the +8.5 when their transfer agent eventually gets called on violating the US/Cand tax treaty. Amoung the other usual suspects in the canadian utes are BRPFF and MCQPF both near pure plays on the carbon cap and Trade and carbon credit themes. No need to love the issue just realize you can profit from it as it does exist. The NPIFF Northland power is another Canadian UTe that allows you to play the currency leverage. The IPS is a grat yielder but of =course the bond intrest portion of the yeild can have a different tax treatment. OTT and NFYIF. I would give the New flyer a chance to air out and get back down nearer $19.65 US$, but again the leverage and an industrial that has the permanent unfair trade advantage. In real este we have not really missed the boat yet on AIV preferreds U &Y but then the chart shows why the Fool seems not to have noticed this niche of the dreaded Reit segment. they will of course continue to proper from the still ongoing ARM resets, Strategic defaults and another +20 % drop in housing prices in must parts of the country due to the misseravble employment situation. 20K going to under employed for each 50K od new full time jobs created. This then benefits PSA and it's preferred issuabnces as well as AIV. the U and Y having call dateds well out. But the AES-C is still below par, the UZV would have been great below par but the call date is over a year past so paying over par could risk your small price premium but the 7.4% is appealing. Keep it watch listed or try buying in the shadow of the ex date when it might dip below or near par. Also in Canada a few other REITs. Of course they have raised rates 3 times this year in part to coll the strong real estate market and head off the "bubble". These companies are not permitted to be followed by the Fool but include ARESF, NPRUF and RIOCF. Well hedged energy plays like DAYYF, PMGYF, some that fool can follow like PWE and ERF are good bets on the global recovery in energy. A little sleeper right here in the Goood ole USA in th energy patch. Check out the latest news on "Export" vis avis Cheniere Energy and the recent del with CHK resulting in a cash infusion. I refer to the GDPAN. This has potential to be a big pay day. Lots could happen a takeover and the calling of GDPAN at par ($50), or it could just get called, or it could move a lot higher based of=n the improved financials of it's sponsor, and the improvement in the onshore O&G industry in general due to the offshore moratorium. Some poster has mentioned the MLPs and there are a bunch of good ones. EPD amoung the best with it's export business to Canada. KMP,NGLS,WHX, and LINE are amoung the best of the best. NMM for it's positions in marine transport, LT charters and buying the gluts in bottoms at rock bottom (oops lets hope they don't hit there) prices. Joe hazel wood now just an American folk hero? Well maybe Martha but not Joe. But Joe has to feel better these days smiling at the BP disaster eclipsing his own 15 minutes. But for those who do not want to deal with K-1 forms there are these great MLP ETFs AMJ has just been ripping and only yields 5.5%. The copy car MLPI a bit beter at 5.7%. Sme closed end funds might be worth a glance KYE and MTP? a sector that has really gotten fully valued perhaps but these yields are relatively safe. The Funds work in tax sheltered accounts whereas the actual individual MLPs cause problems. Gold is a tough one but hey the GGN is looking good it's leveraged preferred "A" trading eith a strong premium and a 2012 call. Some insurers like GFW and GFZ still hanging around near par past their call dates but OK with the small premiums to par. Also PLP with the strong +$3 premium but call protected to 2014 and yielding 6.8%. The Fol ,could have among it's dozens of non-comprehensive publications one that would follow higher yielding investments like some of these but alas they are just not going to spend the effort ofr money chasing good stuff like thse picks down when they are still cheap as in the case of GDPAN. ATGFF was a lot better value at $16.65 when they announced their 40% distribution cut than the $19 handle it has today only with a 5.7% effective yield.

  • Report this Comment On December 04, 2010, at 3:43 PM, willannium wrote:

    So how you know which stocks deal with K-1 forms and which stocks do not? I have invested in a few companies in the past that I had to file K-1. Filing K-1s are such a headache that I had to sell them. Is there a symbol to lookout for? Can anybody tell me so I don't have to invest in those types of companies?

Add your comment.

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: 1301239, ~/Articles/ArticleHandler.aspx, 10/22/2014 2:42:22 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