High Yield Dividend Stocks: What Every Investor Should Look For
By Dennis Miller, Editor, Money Forever
In today’s financial landscape, finding interest on your cash can be a daunting task. Many investors are turning to increasingly riskier options to achieve the returns they once enjoyed from traditional savings vehicles like FDIC-insured certificates of deposit (CDs) or savings accounts. However, there are still reliable strategies to generate income from your investment without exposing yourself to excessive risks.
My wife, who manages our filing system, encountered a disheartening surprise during one of her sessions. She presented me with her IRA brokerage statement, puzzled by the meager interest amount—less than $1. I explained that interest rates had plummeted to alarming lows.
“That’s terrible,” she remarked, and promptly returned to her office to file it away.
Increasing inflation was eroding our savings, while our brokerage account seemed to offer scant interest. When I inquired with our broker, he delivered the disappointing news: “Regrettably, the current yield on our money market fund is 0.01 percent. Compare that to the 4.00 percent rate we enjoyed back in 2007.”
I was taken aback! I made him clarify that figure, confirming it was indeed 1/100 of 1 percent—no typo.
How to Evaluate a Company’s Fundamentals
In one of our more recent reports, The Cash Book, we guided retirees on how to safeguard their cash. Ensuring safety is vital, but traditional avenues—such as checking accounts or money market funds—yield virtually nothing, especially in the face of rising inflation. Even if official inflation hovers around 3 percent annually, settling for a money market fund yielding just 0.05 percent means your cash’s purchasing power is diminishing. To maintain your financial position, you need a yield that at least matches inflation.
There’s no reason to accept paltry yields or sacrifice safety in your investments just to keep pace with inflation.
Many investors, like myself, have watched their monthly interest income dwindle but postponed addressing the issue, thinking they had “bigger fish to fry” within their broader portfolios.
If you find yourself in a similar situation, it’s time to take action. Don’t ignore those disappointing returns any longer. In today’s market, maximizing yield while minimizing risk is crucial. Even a modest increase from 0.01 percent to 1 percent is a significant enhancement. This improved yield diminishes the necessity for high-risk investments elsewhere in your portfolio. When your cash generates sufficient returns, you can afford to be less aggressive with your riskier assets.
In the coming weeks, we will explore various methods to make your money work harder for you while minimizing risk. To kick things off, let’s examine high-yield dividend stocks, which have become an increasingly popular choice for investors seeking reliable income.
Stocks can offer better returns than bonds in the current market. While purchasing stocks doesn’t guarantee the return of your principal, there are well-established blue-chip equities that can enhance your income portfolio. Ideally, these stocks provide both attractive yields and the potential for capital appreciation—a benefit often absent from bonds in such a low-rate environment. However, ensure your yield portfolio is diverse, avoiding an over-concentration in any single stock.
Historically, 10-year U.S. Treasury yields have trended above the average dividend yield for the S&P 500. However, the landscape has shifted, with the S&P’s average dividend yield at 1.98 percent compared to the 10-year Treasury yield of 1.64 percent. This reversal positions dividend-paying stocks as more appealing than ever. We’re thus focusing on financially robust blue-chip companies with yields that more than compensate for the inherent risks.
When assessing a high-yield dividend stock’s stability, begin by analyzing the company’s fundamentals. Much of this data is readily available on finance websites like Yahoo! Finance and MSN Money, or via the research tools within your brokerage account. While a bit of math may be involved, understanding these metrics is straightforward. Here are some essential questions to investigate about any stock, dividend-paying or not:
- Do current assets exceed current liabilities?
- Is there sufficient cash to manage average operating expenses?
- What proportion of operating income is allocated to servicing long-term debt?
By answering these questions, you’ll gain valuable insights into the company’s financial stability. Additionally, stable free cash flow and operating margins that meet or exceed competitors’ can reveal potential competitive advantages.
How to Evaluate a Company’s Dividends
Once you’ve verified the company’s financial soundness, it’s time to scrutinize its dividend. Companies often share their dividend policies on their websites, typically under an “Investors” section, or within their annual reports; however, they may also withhold this information. Fortunately, several key metrics can help evaluate the durability of the dividend.
The payout ratio, calculated as Dividends per Share divided by Earnings per Share, is a leading indicator of dividend stability. A lower payout ratio is preferable; consider any ratio above 80 percent a warning sign.
Currently, the S&P’s dividend payout ratio sits at 37 percent, notably below its long-term average of 50 percent. This suggests a higher likelihood of future dividend increases. Given that companies have been accumulating cash amid widespread economic uncertainty, we may witness rising dividend payouts in the years to come.
Next, it’s crucial to examine the company’s dividend history. Ask yourself:
- Has the dividend been reduced during economic downturns?
- How many consecutive years has the company raised its dividend?
- Is the dividend increasing while the payout ratio and debt levels remain steady?
A consistent history of dividend increases is a positive sign. Companies that have raised their dividends for 25 continuous years qualify as Dividend Aristocrats, a prestigious group of only 51 stocks.
However, the paramount metric is whether a company can regularly raise its dividend without needing to dip into profits or accrue debt, as this demonstrates the safety of the dividend.
These assessments will reflect a company’s ability to meet its short-term obligations while also indicating the dividend’s security. During turbulent economic times, companies with strong fundamentals are more likely to endure and maintain dividend payments.
With these evaluation tools at your disposal, you’ll be well-equipped to investigate dividend stocks for your portfolio.
In our Money Forever newsletter, we’ve recently devised a monthly income strategy featuring some of the safest dividend stocks available. This plan is straightforward to implement and doesn’t demand extensive investment knowledge—just a readiness to learn and a desire for a reliable income stream. Click here to learn more.
Sincerely,
Dennis Miller
for Economic Prism
[Editor’s Note: Throughout his career, Dennis Miller has provided consulting services to numerous Fortune 500 companies, equipping hundreds of executives with skills to effectively communicate the value of their products. His multinational clients include GE, Mobil, Shell, Schlumberger, HP, IBM, Corning Glass, Eastman Kodak, AC Nielsen, and Johns-Manville. In 1995, Dennis devoted significant time to studying investing by engaging with investment managers, authors, and analysts to broaden his understanding. A conversation in 2011 with David Galland, managing partner of Casey Research, led to the recognition of the need to educate baby boomers and retirees about retirement planning. This resulted in Dennis’ book, Retirement Reboot, and his monthly newsletter, Money Forever, along with his free journal, Miller’s Money Weekly. Collaborating with Casey Research, Dennis now advises subscribers on crafting a robust retirement portfolio.]
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