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