Updated on July 11th, 2018
As dividend growth investors age, they naturally experience a paradigm shift with regards to their investment goals.
Investors switch from wanting total returns to seeking pure dividend income. This transition typically involves selling low yield dividend stocks and reinvesting the proceeds into higher yielding alternatives.
So how do investors find the best high dividend yield stocks?
There are currently 421 stocks on major exchanges with 5%+ dividend yields.
The downloadable High Dividend Stocks Spreadsheet above contains the following for each stock in the universe:
- Dividend yield
- Name and ticker
- Price-to-earnings ratio
- Forward price-to-earnings ratio
- Payout ratio
- 5-year beta
You can learn about 5 of our favorite high-yield investment opportunities in the following video:
Keep reading this article to learn more about how to use this spreadsheet to improve your investing.
How to Use the High Dividend Stocks List To Find Dividend Investment Ideas
High dividend stocks make great investments if:
- The dividend is sustainable
- The company is still retaining adequate earnings for internal growth
If either of these two ‘ifs’ are compromised, investors will likely realize sub par investment returns.
Fortunately, investors can easily determine whether these criteria are met by looking at a company’s payout ratio. The payout ratio is the best metric for quickly assessing dividend safety, as it tells investors what proportion of a company’s earnings-per-share are spent on dividend payments. The payout ratio is calculated as follows.
In general, the lower a payout ratio, the better. With that said, it is nearly impossible for a high dividend stock to have a very low payout ratio unless the security is trading at an exceedingly low valuation.
The High Dividend Stocks Spreadsheet allows investors to easily identify high dividend stocks with reasonable payout ratios. If you are unfamiliar with Excel, here’s how to filter for stocks with a payout ratio of less than 80% (which means that for each $1 of earnings, $0.80 – or less – is paid as dividends):
Step 1: Download the list at the link above.
Step 2: Click on the filter button for the payout ratio column.
Step 3: Exclude all companies with negative payout ratios by filtering with payout ratios greater than 0.
A negative payout ratio indicates negative earnings (since dividend payments cannot be negative – so earnings must be), and companies with negative earnings-per-share should be avoided in general.
Step 4: It is prudent to put an upper bound on payout ratios, to exclude companies paying out an unreasonable proportion of their earnings as dividend payments. In the following image, I’ve filtered out stocks whose payout ratios are above 80%.
Note that there is no significance as to why I chose 80% as the payout ratio cutoff. 80% was chosen arbitrarily for the purpose of this example – though an 80% cutoff might be a prudent guideline for some investors.
More conservative investors might have more peace of mind capping payout ratios at 70% or 60%. Similarly, investors with a higher risk tolerance (and a greater thirst for yield) might prefer to cap payout ratios at 90% or even 100%. One of the largest perks about using a stock screener like this Excel document is the personalization capabilities – making it a useful tool for any investor.
High Dividend Stocks and Valuations
One of the largest concerns that astute investors have about new purchases is value.
Value is inherently different than price – just because a stock has a high market price does not mean it is a poor value if the underlying earnings-per-share are correspondingly robust. Berkshire Hathaway (BRK.A) (BRK.B) – with its $250,000+ stock price – comes to mind as an example of this.
Unfortunately, the highest quintile of dividend paying stocks is overvalued compared to its historical average. These companies are trading at a multiple of earnings that is more than twice its long-term average as income-thirsty investors bid up their stock prices.
Source: Alliance Bernstein, data as at September 2016
The data in the above diagram is a bit stale (dated at September of 2016), though the valuations of high dividend stocks are likely to be even more stretched today given the continuation of the current bull market.
Fortunately, the High Dividend Stocks Spreadsheet allows investors to filter not only for payout ratios (as we have already seen) but for price-to-earnings ratios (the most common metric used to measure valuation). In the image below, I have filtered the spreadsheet for stocks with a forward price-to-earnings ratio below 20 and listed these stocks from lowest P/E to highest P/E.
Depending on the characteristics of the underlying business, a forward price-to-earnings ratio of 20 is a reasonably good value in today’s market. For context, the average price-to-earnings ratio of the S&P 500 is about 25 right now. Make no mistake, though – it is rare for S&P 500 stocks to trade at 25 times earnings, on average. The market is overvalued today.
With that said, the S&P 500 is made up of ~500 individual stocks… Some of which still offer high dividend yields.
It is important to compare a stock’s valuation to three benchmarks:
- The stock’s historical price-to-earnings ratio
- The price-to-earnings ratio of stocks in the same industry
- The price-to-earnings ratio of the overall stock market (as measured by the S&P 500)
The High Dividend Stocks Spreadsheet helps significantly with #2 in the above list.
Why Are High Dividend Stocks Important?
This article provides a comprehensive list of stocks with 5%+ dividend yields.
So why are high dividend stocks important?
There are many reasons. The most obvious is that high dividend stocks will be preferred for income-seeking investors such as retirees. If 5% (or less) of your invested assets are required each year to cover living expenses, then a portfolio of stocks from this article’s spreadsheet will provide adequate income without having to sell securities.
High dividend stocks are also signs of a shareholder-friendly company. Stocks that pay dividends show both the ability and willingness to generate profits and distribute them back to the ultimate owners of the business’ assets – the shareholders.
Perhaps the most compelling validation for the importance of dividends is that a large component of the historical total return of equity securities has been dividend payments.
The following diagram compares the total returns versus capital gains (which is equivalent to total returns less dividend payments) of U.S. and U.K. stocks since 1900.
The difference is substantial. This underscores the importance of dividend payments in a holistic equity investment strategy.
In particular, companies that grow their dividends tend to show the most outperformance over the aggregate stock market, followed by dividend-paying companies in general.
Remarkably, these universes of stocks demonstrate outperformance while assuming less risk (as measured by standard deviation) – which results in fantastic risk-adjusted returns for the company’s shareholders.
This trend is outlined below.
Source: Hartford Funds
To conclude, dividends are important because they are the only way for an investor to realize profits from an equity investment without reducing or eliminating their stake in the underlying company. Dividends are also correlated with superior returns on both an absolute basis and a risk-adjusted basis.
Investments Legally Required to Pay Shareholders Their Income
REITs are required by law to pay out 90% plus of their income to investors. That’s why REITs tend to have higher than average yields. You can see 10 of the highest yielding REITs analyzed in detail here.
MLPs, like REITs, tend to have high yields. MLPs are required to pay out at least a percentage of income they set forth in their partnership agreement. While this may not sound overly strict, in practice MLPs are some of the highest yielding investments around.
Another characteristic income oriented investors should look for is the frequency of dividend payments. There are a a handful of stocks that have high yields and pay monthly dividends. While not legally required to do so, these high yielding monthly dividend payers are committed to paying their investors every month instead of every quarter.
Other Sources Of High-Quality Dividend Stocks
To invest in great businesses, an investor has to find them first.
This might seem like a daunting task if you’ve already searched through the High Dividend Stocks Spreadsheet and still haven’t found a stock you like (which is unlikely).
Luckily, there are plenty of high-quality businesses that fall outside of the universe of stocks contained in the High Dividend Stocks Spreadsheet. In fact, a cutoff of 5% for high dividend stocks might seem arbitrary. You could certainly find a stock with a 4.9% dividend yield that has much better investment prospects that another particular stock with a 5.1% dividend yield.
Fortunately, there are many other filters that investors can use to find high quality businesses.
One of our favorites is to look for companies with a long operating history, and a long history of increasing their dividends to shareholders. The following databases cover these types of companies in detail.
- The Dividend Kings: Stocks with 50+ years of consecutive dividend increases
- The Dividend Aristocrats: Stocks with 25+ years of consecutive dividend increases
- The Dividend Achievers: Stocks with 10+ years of consecutive dividend increases
- Blue Chip Stocks: 3%+ yields and 100+ year histories
Investors can also look to the dividend portfolios of successful, institutional investors.
Large portfolio managers with $100 million or more of assets under management must disclose their holdings in quarterly 13F filings with the U.S. Securities & Exchange Commission. Sure Dividend has analyzed the dividend portfolios of the following high-profile investors in detail:
- Warren Buffett’s Top 20 High Dividend Stocks
- Seth Klarman’s Top 5 High Dividend Stocks
- Joel Greenblatt’s Top 20 High Dividend Stocks
- Prem Watsa’s Dividend Stock Portfolio: Every Holding Analyzed
In fact, we don’t necessarily need to restrict our investing universe to the dividend stock holdings of billionaire investors. Non-dividend holdings of exceptional investors can sometimes make attractive investments as well.
To that end, the following articles might be useful: