Many income-seeking investors look for stocks that will maximize their current income from dividends. The popular "Dogs of the Dow" strategy has become popular in part because of its simplicity, and even though it hasn't always resulted in better returns than the overall Dow, it nevertheless places the emphasis on dividends that many investors value.
But there's no magic to restricting your use of high-dividend stocks to the Dow. Today, let's look at the stocks within the S&P 500 (SNPINDEX:^GSPC) that had the highest yields as of the beginning of 2013 to see how they've fared so far this year.
Some big winners ...
The S&P 500 stock with the highest yield has also been one of its best performers this year. Pitney Bowes (NYSE:PBI) has risen 45% since starting out the year with a dividend yield of more than 14%, doing a good job of reversing a share-price plunge of more than 40% during 2012 as it struggled to find a viable transition beyond its once-dominant postal-meter business. Yet when Pitney Bowes announced earnings in late January, it managed to limit revenue losses to just 1%, topping estimates and sending the stock soaring. Still, in the long run, it will need to succeed with its broader enterprise-communications strategy if it wants to sustain its high payout, which even now still yields 10%.
But the biggest gainer among top-yielding S&P stocks has been Best Buy (NYSE:BBY), which is up 94% year to date. The company started off January with positive holiday sales news, and even though the big-box electronics retailer reduced its free cash flow projections, shares started moving higher. Since then, the bull run has gained steam, as Best Buy announced full quarterly results in early March and gave initiatives that it hopes will end the practice of showrooming that has hurt the company so much in the past. As optimism about the stock has built, investors have relied less on the idea that co-founder Richard Schulze would take Best Buy private and instead have jumped onto the turnaround bandwagon.
... and losers
But not all of the S&P's big dividend payers have fared as well. Cliffs Natural Resources (NYSE:CLF) came into 2013 with a 6.5% dividend yield, but that payout didn't survive the company's quarterly earnings report. Because of rock-bottom iron ore and metallurgical coal prices and weak demand for the key ingredients for steel production, as well as operational problems that have forced reduced expectations from its key mines, Cliffs had to cut its dividend by more than 75%. As a result, the stock has plunged 46% so far this year, and its forward dividend yield has dropped to below 3%.
The other big dividend cut among the top S&P yielders came from CenturyLink (NYSE:CTL), which had a 7.5% dividend yield at the beginning of the year and has fallen by 9% since then. The high-yielding rural-focused telecom company reduced its dividend by 25%, resulting in an investor exodus not only from CenturyLink but also from its high-yielding rural-telecom peers. Yet the interesting thing about the announcement was that it came with a $2 billion share-buyback program, reflecting a decision to reallocate capital rather than suggesting a lack of profits. Indeed, with ample cash flow to pay the dividend, CenturyLink's decision could well prove to be a smart move if its stock stays cheap for long enough for the company to implement its buyback soon. Moreover, CenturyLink still yields more than 6% -- hardly a low yield even for telecom stocks.
Watch those dividends
The key to understanding high-yielding stocks is that you always have to ask why a dividend yield is so high. Being highly discriminating in your choices among high-dividend stocks can save you from train wrecks and boost your income.