Montana Money: How to Find the Best Dividend and High Yield Stocks
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How to Find the Best Dividend and High Yield Stocks

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With interest rates so low there has to be a better way to have your money working for you. Finding stocks that pay a decent dividend and a good yield is the best bet. With banks and CDs paying nothing, it is important to find the best and safest dividend paying stocks.

With banks, money markets, and certificates of deposits (CDs) paying such minimal interest rates, investors are looking elsewhere for a decent yield. 

 

Decent means paying more than the average CD and more than the current rate of inflation. You also want to find a safe yield. Here are some of the factors you need to look at when finding the best high-dividend paying stocks.


Dividends and Yields

 

There will only be a yield on a stock if that company pays a dividend. The yield of a stock is calculated by dividing the dividend payment by the price per share.

 

If a stock pays a $1 dividend and the price per share is $50, the yield will be 2% ($1 dividend divided by $50 share price x 100 = 2%). Most places where you can get a stock quote will also show the dividend and yield for you.

 

The yield of a stock will go up if the company raises its dividend. The yield of a stock will also go up when the stock price goes down, which is why, when you find a high yield stock, you have to look at the stock price history.

 

The above example yield would change to a 5% yield if the dividend stayed the same and the stock dropped to $20 per share ($1 dividend divided by $20 share price x 100 = 5%).


High Yields Can Mean Trouble

 

When you hear of a company with a high yield, it doesn’t always mean something good. We know that the yield goes up when the stock price falls.

 

When looking at any company’s stock, dividend, and yield, make sure you research the reasons for the high yield and possible stock price drop.

 

A high yield doesn’t tell the whole story. If the yield increased because the stock price dropped, there could be a chance the company has some financial problems. If so, there is a good chance they could cut their dividend or maybe even eliminate it in the future.

 

A good example is a stock like Great Northern Iron Ore Company (GNI). They were once considered to be a great dividend stock.

 

Today their dividend yield is 29.69%. That might sound great, but you have to look at their stock price history. Their stock price has dropped from a 52-week high of $76.74 to its current price of $18.22, which is why their dividend yield is so high.

 

The Beta of a Stock

 

The beta of a stock is a measure of its volatility. The S&P 500 has a beta of 1. Any stock with a beta lower than 1 should be less volatile than the overall market. A stock with a beta of 1 or less is expected to be steady and not rise and fall so drastically during bull or bear markets. 

 

Finding a decent yielding stock with a beta of 1 shows that it can be a steady dividend-producing investment year after year, even during bear markets. 


Dogs of the Dow Strategy

 

The Dogs of the Dow is a long-time strategy for investing in high-yield stocks. Some people like to pick five stocks from the DJIA, while others choose 10 stocks from the DJIA with the highest yields.

 

Since yields rise when a stock price falls, buying these high-yield DJIA stocks means that they dropped during the last year. The thinking is that by buying these down stocks, they will rise during the coming year.

 

To invest in the Dogs of the Dow, you would put equal amounts of money into each five or ten of these stocks. This is the opposite of chasing winners. Of course, the main worry is that some of these dog stocks dropped for a reason and could continue to fall and cut their dividend payment.

 

The top five highest yield DJIA stocks as of July 2014 are:

 

  • AT&T (T) with a yield of 5.13%
  • Verizon (VZ): yield of 4.26%
  • Pfizer (PFE): yield at 3.41%
  • Merck (MRK): 2.97% yield
  • General Electric (GE): 3.28% yield

Increasing Dividends

 

It is also important to look at the track record of dividend-paying stocks, do they have a history of increasing their dividend.

 

Stocks that are known to increase their dividends are a good bet they will continue to do so. You do not want to invest your money and then have that company slash its dividend.

 

Look at a company's dividend growth rate. Has the company continued to increase its dividend year after year, and can a company continue paying its dividend.


Dividend Aristocrats

 

There is a list of stocks that are called the Dividend Aristocrats. To be included on the Aristocrats list, these stocks have had to raise their dividends for at least 25 consecutive years. Some of the aristocrat stocks include:

 

  • Proctor & Gamble (PG) has raised dividends for 57 years with a yield of 3.21%
  • Coca-Cola (KO) has a 2.89% yield and has raised dividends for 51 years.
  • Johnson and Johnson (JNJ) has a 2.66% yield and has increased its dividend for 51 straight years.
  • Northwest Natural Gas (NWN) has a yield of 4.00% and has raised dividends for 58 years.
  • Altria Group (MO) with a dividend yield of 4.53% and 44 years of increasing dividends.

 

Instead of picking your own stocks, you can buy a dividend ETF that tracks the Dividend Aristocrats index with the SPDR S&P Dividend (SDY).



Other Good Dividend  Stocks to Consider

 

The following stocks have good dividend yields as of July 2014, but some of these are riskier than others and should be watched more than a blue-chip stock on the Aristocrats list.

 

  • Kinder Morgan Energy Partners (KMP): Dividend yield of 6.70%
  • Magellan Midstream Partners (MMP): 2.95%
  • Fifth Street Finance Corporation (FSC): 10.2%
  • Triangle Capital Corporation (TCAP): 8.77%
  • Martin Mainstream Partners LP (MMLP): 7.65%
  • Watsco (WSO): 2.33%
  • Life Partners Holdings (LPHI): 8.03%
  • Annaly Capital (NLY): 10.85% 
  • New Residential Investment Corp (NRZ): 10.90%

 

Annaly Capital is a mortgage REIT (Real Estate Investment Trust). The high yield might normally be a warning, but REITs can be good dividend-paying stocks. 

 

New Residential Investment Corp is another mortgage REIT and a decent dividend-paying stock at this time. Climbing interest rates should not affect NRZ negatively. 



Specialized High Yield Stocks

 

There are several other types of investments that have good yields but can be volatile. They include Energy Master Limited Partnerships, Royalty Trusts, Business Development Companies and Real Estate Investment Trusts. They include:

 

  • Natural Resource Partners (NRP) with a yield of 8.54%
  • BP Prudhoe Bay Royalty (BPT) 12.26%
  • Blackrock Kelso Capital Corporation (BKCC) 9.18% yield
  • Capstead Mortgage (CMO) with a 10.54% yield and a 0.39 Beta.

 

 Finding High Yield Stocks

 

You can use the Yahoo stock screener and set the yield, beta, and other parameters that fit your needs to find good dividend-paying stocks. 

 

Many people just want a decent yield and income from the dividends. Many investors are not interested in capital gains. They are mainly interested in the income from the dividends. 


Do the Research


Make sure you do your research. You do not want to buy the next Lehman Brothers or Washington Mutual because they have a high-yielding dividend. 

 

Copyright © January 2011-2014 Sam Montana


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