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3 Top Dividend Stocks With Yields Over 4%

By James Brumley - Dec 19, 2020 at 6:56AM

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Investors don't necessarily have to skimp on safety to enjoy above-average payouts right now.

With benchmark interest rates around the world still at or near record lows, stock dividend yields are correspondingly weak. The S&P 500's average yield now stands right around 1.6%, which is the lowest we've seen from the index since 2002, when the Federal Reserve was frantically trying to reverse the dot-com meltdown.

However, even now, a handful of quality stocks are still yielding in excess of 4%, and they don't carry the sort of risks that usually accompany above-average dividends. PPL ( PPL 0.65% ), Toronto-Dominion Bank ( TD 1.46% ), and Dow ( DOW 2.40% ) rank among the best of these higher-yield prospects.

Small dividend sign standing next to a roll of $100 bills.

Image source: Getty Images.

Toronto-Dominion Bank

Dividend yield: 4.3%

It's been a particularly tough year and a half for banks. The profitability of their lending activity is directly linked to interest rates -- the higher the benchmarks are, the better it is for them. So, when the Federal Reserve (and other central banks) started to ratchet their base rates lower last year, loan profitability was squeezed.

Investors arguably priced in too much doubt regarding Toronto-Dominion's business though. To put in to perspective, 40% of its direct revenue isn't interest rate based, while around 10% of its income comes from (or, rather, came from) its stake in brokerage firm TD Ameritrade, which was officially acquired by Charles Schwab in October. Moreover, loan losses linked to the global economic slowdown may have been overestimated for Toronto-Dominion, and countered by fresh demand for loans while interest rates are at ultra-low levels. For the three-month stretch ending in October (its fiscal fourth quarter), the bank's provisions for credit losses were only 3% higher than year-earlier levels, while its loan portfolio is now about 5% bigger.

Its fiscal third-quarter loan-loss provision was sizable, but that period was when concerns about the pandemic's potential economic fallout were running high. Now, it seems investors and banks may have been anticipating a greater degree of trouble than will materialize. As such, Toronto-Dominion's nine-year streak of increased dividend payouts isn't likely to be in any real jeopardy of ending.


Dividend yield: 5.2%

It would be inaccurate to say that chemical company Dow hasn't been adversely impacted by the coronavirus pandemic. Sales through the first three quarters of the year are down 15%, driving what's essentially a year-to-date breakeven. Boston Consulting Group reckons that when all is said and done, the global chemical industry's revenue will shrink by 9% in 2020.

Yet it would be naive to ignore the fact that the end of the pandemic is now visible on the horizon. Boston Consulting is also calling for 10% sales growth for the chemical industry in 2021 -- a forecast that jibes with those of other prognosticators. As the American Chemistry Council's chief economist, Kevin Swift, noted last month: "With seven straight months of gains, the November CAB [chemical activity barometer] reading is consistent with recovery in the U.S. economy."

Investors seem to see it, but don't firmly believe it yet. Either that, or they still fear the dividend is at risk. Dow shares have rallied by 100% from their March lows, but that puts them just about where they were in early January.

This stock price underperformance is the key to the opportunity. It translates into an above-average dividend yield of 5.2% for new investors, based on a payout that's still relatively well protected. This year's pandemic-caused problems will likely drive Dow's earnings per share down from last year's $3.49 to $1.44, which is less than the stock's current annualized payout of $2.80. Building on the industry's budding recovery, however, analysts are calling for a 2021 per-share profit of $2.76, en route to complete coverage of the dividend again by 2022.


Dividend yield: 6.1%

Finally, most lists of dividend stocks to consider include at least one utility stock, and for good reason. Consumers may postpone a vacation or skip a trip to the mall, but barring particularly grim financial situations, they're going to pay the bill to keep the electricity on.

This list of recommended dividend stocks will be no exception to the norm. PPL is a pick of the litter among utilities that merits a closer look from income investors. Its current yield of 6.1% is more than almost all other large-cap utilities are paying.

Here too, the above-average yield is the result of below-average performance. PPL shares have rebounded only halfway back from their March lows. Yet nothing's fundamentally changed about the company in the meantime, nor about its dividend profile. It's paying out at an annualized pace of $1.66 per share  -- a figure well below the $2.42 per share it's projected to earn.

Investors aren't overlooking something analysts have noticed either. The analyst community collectively fields a price target of $30.77 for PPL right now, which is more than 11% better than where the shares were trading Thursday morning. So this stock pick has some capital appreciation potential packaged with its healthy payout.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Dow Inc. Stock Quote
Dow Inc.
$55.17 (2.40%) $1.29
DuPont de Nemours, Inc. Stock Quote
DuPont de Nemours, Inc.
The Toronto-Dominion Bank Stock Quote
The Toronto-Dominion Bank
$75.10 (1.46%) $1.08
PPL Corporation Stock Quote
PPL Corporation
$29.41 (0.65%) $0.19
The Charles Schwab Corporation Stock Quote
The Charles Schwab Corporation
$81.77 (1.74%) $1.40

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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