Dividend stocks keep getting hotter.
The number of companies that are in the Standard & Poor’s 500 index that pay dividends—423 at press time—is the highest that it’s been since 1997, says Howard Silverblatt, who is a veteran analyst at S&P Dow Jones Indices. Investors turned to dividend stocks as interest rates stayed at historic lows.
Of course, banks pay little to nothing on deposits, and bonds now yield a fraction of what they used to, so finding an investment that provides guaranteed income is significantly more difficult than it used to be, Silverblatt says. Dividends also enjoyed favorable tax treatment over the past 12 years, which made their income more appealing than ever before. Further, experts say, companies that pay stock dividends typically continue to do so even if a stock’s price falls. “Dividends can help mute the pain of those downturns to some degree,” says Wally Obermeyer of Obermeyer Wood Investment Counsel.
With those factors in mind, Consumers Digest interviewed seven money managers and finance professors who specialize in dividend research to develop a list of criteria to determine a great dividend stock:
DIVIDEND GROWTH: A company should have a record of a dividend increase at an annualized rate of at least 10 percent over the past 3 years. This doesn’t mean that it had to increase by 10 percent every year; a company could, for example, boost it by 30 percent one year and hold it steady the next 2 years.
DIVIDEND YIELD: A great dividend stock should have a dividend yield—the annual payout divided by the stock price—that pays well. The average dividend yield of stocks that are in the S&P 500 is just over 2 percent. The experts with whom we spoke generally agree that a great dividend stock should have a yield that’s at least 50 percent more than the current S&P average.
HISTORY: A company should have paid its dividend for the previous 5 years. It also has to at least maintain its dividend during that time to demonstrate its commitment to investors.
REASONABLE PAYOUTS: Some companies court trouble by paying out most or all of their profit. A decline in profit would make these companies vulnerable to a dividend cut, experts say. Consistently high dividends could be a detriment to a company’s capital, says Diane E. Jaffee, who is the manager of TCW Relative Value Dividend Appreciation Fund. Consequently, a company shouldn’t pay out more than 90 percent of its reported profit more than once in the past 5 years.
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By applying the S&P Capital IQ screening tool to our criteria, we cut the list of U.S. dividend-paying stocks, which stood at 2,741 (out of 5,301 total stocks) at press time, to 59. We then looked at the companies’ recent profit reports, because companies that have profit growth are better able to maintain and increase a dividend. We also looked at market capitalization—the total value of a company’s outstanding shares—and disqualified companies that fell below $1 billion. Companies that have a smaller market capitalization typically are considered to be more volatile.
Finally, we looked at how expensive a stock is compared with the profit that it delivers. Paying attention to price is important, Obermeyer says, because paying a particular price, or twice that price, makes a big difference in your return over time. Consequently, we chose stocks that were less expensive by at least one of two measures. One was the company’s price-earnings (P/E) ratio; the other was its ratio of enterprise value to EBITDA—earnings before interest, taxes, depreciation and amortization. EBITDA measures the amount of cash that a company generates. Enterprise value is a company’s market capitalization plus its debt, compared with its EBITDA. Companies that were in the top quarter in one of these measures made our final list.
The 12 stocks that remained are great dividend stocks because of the combination of a strong recent track record of payouts and affordability compared with others. Energy and shipping are represented more than once. The drop in the price of oil in late 2014 put many energy-related companies’ stocks in the bargain bin; four made our list. A decline in lease rates for shipping containers in 2014 put two shipping-container companies on our list.
The annual dividend for each company is for the per-share amount as of press time; stock prices are as of press time.