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Tue. Oct. 13, 2009

High-Yield Dividend Stocks: A Safer Approach *

When people learn that I am an income investor, the reaction is often a desire to discuss high-yield investments. The uninitiated commonly confuse income investing with high-yield investing. The two are not the same.

High-yield investing often carries a greater degree of risk than I am willing to accept. Recently, a reader alerted me to an article describing a 20-year study by the Schwab Center for Financial Research demonstrates that investments with the highest yields don’t necessarily provide the highest returns and offers a safer way to implement a high-yield approach. Here are some key excerpts from the article:

  • Stocks with the highest dividend yield haven’t provided the best total return.
  • Research found the highest-yielding stocks had twice as many dividend cuts as the other dividend-paying groups.
  • Price momentum is a stock indicator based on the idea that stocks that have been outperforming in the past will continue to do so.
  • A simple screen using the six-month price momentum strategy applied to the highest-yielding stocks can help you pick the best performers.
  • The screen is implemented using:
    • Stocks in the S&P 500, 400 and 600 indexes.
    • Dividend Yield and click the dividend yields greater than 1.5 times the S&P 500 yield.
    • Capture analyst ratings.
    • 6 Months Price Performance > Price Change.
    • Sort by price performance and select the highest analyst ranked  stocks within the top 45.

Since the article was very Schwab specific, I tried to generalize the above screen. If you have a Schwab account, please refer to the article for more specific instructions.

So, what does all this mean? If you are an income investor that enjoys trading instead of buy and hold, then this may be something you want to explore further.  However, the 11.5% earned with this strategy vrs. the  10.73% for dividend stocks not in the highest yielding group hardly seems worth the effort.

For me, I will continue to focus on high-quality dividend stocks at lower, but growing,  yields. However, for those looking to bump their yield a little, below are several Dividend Aristocrats and Achievers that are currently yielding more than 5%:

CenturyLink Inc. (CTL) – Aristocrat – Yield: 8.6%
Lilly Eli & Co. (LLY) – Aristocrat – Analysis -Yield: 6.0%
Integrys Energy Group Inc. (TEG) – Aristocrat – Yield: 7.8%
Consolidated Edison Inc. (ED) – Aristocrat – Yield: 5.8%
Progress Energy Inc. (PGN) – Achiever – Analysis – Yield: 6.5%
Realty Income Corp (O) – Achiever – Yield: 7.1%
Health Care Property Investors, Inc. (HCP) – Achiever – Yield: 6.8%
Cincinnati Financial Corp. (CINF) – Aristocrat – Yield: 6.2%
Leggett & Platt Inc. (LEG) – Aristocrat – Analysis – Yield: 5.7%
Pitney Bowes Inc. (PBI) – Aristocrat – Yield: 6.0%
AT&T Inc. (T) – Achiever – Yield: 6.2%
Black Hills Corp. (BKH) – Achiever – Yield: 5.8%
Capital City Bank Group (CCBG) – Achiever – Yield: 5.6%
Universal Health Realty Income Trust (UHT) – Achiever – Yield: 7.5%

This by no means is an endorsement of the above stocks. If you are looking for high-yields, you might lower your risk some by looking at a pool of stocks that have a long history of increasing their dividends.

Full Disclosure: Long CTL, LLY, TEG, ED, PGN, O, HCP . See a list of all my income holdings here.

(Photo: Steve Woods)


2 Responses to “High-Yield Dividend Stocks: A Safer Approach *”

  1. Being the lazy sort of investor, I’d stick to your strategy as well.

    I mean heck, who has the time to really be trying to focus on high yielding stocks when you can sit back and just manage the high income producing dividends instead?

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