Updated on August 28th, 2018
High dividend stocks make great investments for those in need of current income. That’s because they pay out more in dividends for every dollar invested.
But, there is a downside to investing in higher yielding securities… They tend to have greater risks of cutting their dividends in the future.
This article helps income seeking investors minimize the downside of investing in high yield stocks by showing exactly how to find the best high dividend investments.
But first, what exactly is a high dividend stock?
There is no one completely agreed upon cut-off for ‘high yield’ (or low yield for that matter). The S&P 500’s dividend yield is near its historical low. What passes as high yield today would probably be considered an average yield several decades ago.
Today, some put the cut off at 3%, or 4%. In this article we define a high dividend stock as any stock, MLP, REIT, or BDC with a yield of 5% or greater. This is a higher income bar, but it also puts the focus on true high income securities.
There are currently 390 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
Keep reading this article to learn more about how to use this spreadsheet to improve your investing. A preview of the data table is below:
|Ticker||Price||Dividend Yield||Market Cap ($M)||P/E Ratio||Payout Ratio|
|Ticker||Price||Dividend Yield||Market Cap ($M)||P/E Ratio||Payout Ratio|
A Table of Contents for quick navigation is below.
Table of Contents
- How To Find The Best High Yield Stocks for Safety & Income
- High Dividend Stocks & Valuations
- Why High Dividend Stocks Matter
- Types of High Yield Investments
- Warren Buffett’s Highest Yielding Stocks
- Monthly Dividend Stocks
- Dividend Aristocrats
- 3 of The Safest High Dividend Stocks Today
- Final Thoughts & High Dividend Video
How to Find The Best High Yield Stocks for Safety & Income
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.
And that’s where the high dividend stock spreadsheet comes in…
The High Dividend Stocks Spreadsheet allows investors to easily identify high dividend stocks with reasonable payout ratios (and more).
A high yield mixed with a reasonable payout ratio is the fastest way to quickly identify safe high yield stocks.
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%.
The 80% payout ratio cut off is arbitrary. 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%. One of the 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.
Alternatively, you can use the table below to see and sort high dividend stocks by yield.
|wdt_ID||Symbol||Name||Dividend Yield (Forward)|
|1||BTI||British American Tobacco||0.05|
|2||LND||Brasilagro - Cia Bras||0.05|
|3||WSTG||Wayside Technology Group||0.05|
|4||GRP.U||Granite Real Estate Investment Trust||0.05|
|9||AM||Antero Midstream Partners||0.05|
|Symbol||Name||Dividend Yield (Forward)|
Why High Dividend Stocks Matter
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.
Types of High Yield Investments
Broadly, there are 2 common types of equity investments in the stock market today:
- Securities that give you ownership in an individual business
- Securities that give you access to a bundle of businesses
The first type are individual stocks, REITs, MLPs, and BDCs. You are investing directly into an actual business in these cases.
The second type of equity investment puts the decision making power into someone else’s hands. Mutual funds, ETFs, and closed end funds (CEFs) are all investment vehicles that typically invest in individual securities and charge people who invest in the fund a management fee.
This article explores how to find the best high dividend stocks, REITs, and MLPs – focusing on individual securities rather than funds that charge fees.
A list of our favorite places to look for high yielding securities is below.
- Warren Buffett’s Highest Conviction Stocks
- Monthly Dividend Stocks
- Dividend Aristocrats
Warren Buffett’s Highest Yielding Stocks
Warren Buffett is perhaps the single greatest investor of all time. His long-term track record of success is unparalleled.
The Oracle of Omaha is known to focus on quality and long-term competitive advantages. That makes ‘poaching’ ideas from his portfolio a good idea for income investors in search of safe and stable dividends.
Unfortunately, Buffett’s portfolio doesn’t currently have any stocks with 5%+ yields…
But, it does have several stocks with 4%+ yields. The complete list of 4%+ yielding Buffett stocks is below:
|wdt_ID||Name||Ticker||Dividend Yield||% Buffett’s Portfolio|
|Name||Ticker||Dividend Yield||% Buffett’s Portfolio|
Note: Buffett has an extremely small position in Verizon (VZ) of 928 shares.
Four of the five stocks above make up less than 1.5% of Berkshire Hathaway’s portfolio combined. Still, the fact that Buffett has included them in his portfolio at all shows they are worth a second look for investors looking for high income.
Related: He may not be in the same echelon of wealth or investing prowess, but Kevin O’Leary is another dividend ‘super investor’ with a portfolio worth seeing.
The 4%+ yielding stock that stands out is Kraft Heinz. Make no mistake, Kraft Heinz is Warren Buffett’s highest conviction high yield stock holding. Buffett has invested 10.7% of Berkshire’s portfolio into the packaged food and condiment giant.
It’s easy to see what Buffett likes in Kraft Heinz. The company owns a collection of stable, high quality food brands that are likely to perform well regardless of the overall economy (including during recessions). Additionally, many of Kraft Heinz’ brands have long histories of popularity. They have proven the test of time and are likely to generate high margins for Kraft Heinz far into the future.
The image below shows Kraft Heinz’ brand portfolio:
Source: Kraft Heinz
Monthly Dividend Stocks
High dividend stocks are appealing for the income they produce. Unfortunately, the vast majority of high yield stocks pay out quarterly. Most bills come in monthly. Income timing isn’t lined up with expense timing in this scenario.
There is a unique group of stocks that get around this issue… Monthly dividend paying stocks. These are stocks that pay out every month instead of every quarter.
To be clear, there aren’t many monthly dividend payers. We’ve identified just 41 monthly dividend payers. Interestingly, monthly dividend stocks also tend to be high dividend stocks. In fact, there are several monthly dividend stocks that have yields north of 10%.
You can see detailed analysis of the 10 highest yielding monthly dividend stocks here.
The downside of monthly dividend stocks is that they tend to be riskier. Paying dividends every month is a technique that management teams may use to attract investor capital. And a company that has to try hard to get people to invest may not be a good investment. We see elevated risk with many monthly dividend payers.
With that said, there are some monthly dividend paying stocks that are of a very high quality. Realty Income (O) stands out in this regard.
Realty Income is a Real Estate Investment Trust (REIT) with a 4.8% yield and a $16 billion market cap. The company focuses on developing stand-alone real estate for well-known retailers. The company has paid 577 consecutive dividend payments in its 49 year history, and increased its dividend 97 times since going public in 1994.
Realty Income is the ‘gold standard’ in safety and longevity within the monthly dividend stock universe.
The Dividend Aristocrats are a group of just 53 S&P 500 stocks with 25+ years of consecutive dividend payments.
They include many of the most iconic dividend stocks around. Several examples are below:
Increasing dividends for 25 consecutive years is no small feat. A company must have (or at least recently had) a strong and durable competitive advantage and a sustainable growth engine to grow its dividends every year for such a long period of time.
A streak of 25+ years means paying rising dividends every year through the Great Recession, the tech bubble, and more. Interestingly, the Dividend Aristocrats index has also significantly outperformed the market. Over the last decade, the annualized total returns of the Dividend Aristocrats index are 13.3%, versus 10.2% for the S&P 500.
And, the Dividend Aristocrats Index generated whopping 3 percentage point outperformance with lower volatility than the S&P 500. The Dividend Aristocrats’ 10 year annual price standard deviation is 13.6%, versus 14.7% for the S&P 500.
While the Dividend Aristocrats score high marks for safety, growth, and returns, they aren’t – in general – known for their high yields. But there are exceptions. The highest yielding Dividend Aristocrats (4%+ yields only) are below:
- AT&T (T) – 6.2% dividend yield
- AbbVie (ABBV) – 4.2% dividend yield
- ExxonMobil (XOM) – 4.0% dividend yield
Only 3 Dividend Aristocrats have yields of 4% or greater. AT&T’s yield immediately stands out; it is almost 50% higher than the 2nd highest yielding Dividend Aristocrat. AT&T is the only Dividend Aristocrat that is a telecom (it’s also very undervalued at current prices).
Note: The Dividend Achievers are a less-selective group of stocks with 10+ years of rising dividends, while the Dividend Kings are the pinnacle of dividend longevity, with 50+ years of rising dividends.
The telecommunications segment is categorized by:
- Sluggish growth
- Large barriers to entry
- High capital investment expenses
- Large payout ratios and high dividends
You can see the full list of all 138 telecommunications sector stocks here.
In the United States, the wireless telecommunications industry is absolutely dominated (more than 90% of the market) by just a few large players:
- AT&T (T)
- Verizon (VZ)
- Sprint (S)
- T-Mobile (TMUS)
Of these 4 companies, only the 2 largest pay a dividend; AT&T and Verizon. They are also the two largest by far. Each has more than 30% of the US wireless market, and each sports a market cap of over $200 billion. For comparison, Sprint and T-Mobile combined have a market cap of around $70 billion.
Of particular importance for investors looking for income, both AT&T and Verizon have high dividend yields:
- AT&T has a dividend yield of 6.2%
- Verizon has a dividend yield of 4.5%
AT&T appears significantly undervalued at current prices, and it is the highest yielding Dividend Aristocrat (see the section above). Verizon is also a compelling investment at current prices, but it doesn’t have as high a yield as AT&T, and it isn’t as undervalued.
One of the additionally compelling features about the telecommunications industry in general, and the reason why its strongest players can pay out the bulk of their income as dividends, is the stability of cash flows in the industry.
The video below highlights AT&T’s dividend safety.
AT&T and Verizon lock their customers into long-term contracts that generate recurring revenue. They provide a utility-like service (who can go without a smart phone in 2018?) that consumers are very likely to continue paying for regardless of the overall economy. This makes high quality telecoms like AT&T and Verizon particularly recession resistant.
The utility sector has long been a favorite of those in or near retirement, and those seeking stable high income stocks. That’s because utilities have a unique mix of characteristics. The ‘typical’ utility stock has:
- High debt
- A high payout ratio
- A high dividend yield
- Sluggish growth prospects
- A strong and durable competitive advantage
Utilities tend to operate in natural monopolies. It doesn’t make sense to have the infrastructure for 6 natural gas providers to one neighborhood, or 4 electricity providers. Due to the high costs of installing and maintaining infrastructure, most areas have only 1 major utility service provider for each service.
Instead of market competition, utilities ‘compete’ with regulators for rate hikes to boost profitability. Otherwise, most utilities would grow only at the rate of population in its geographic area. And indeed, most utilities to grow very slowly, often just around or slightly above general inflation.
The combination of highly regulated markets and natural monopoly make utilities (on average) very safe investments. They have beautifully stable cash flows (again, in general). The consequences of not paying your electricity bill are severe; this makes utilities recession resistant.
While utilities don’t have as much competition in their local markets, utility stocks do compete with other investments for investor’s dollars. With limited growth prospects and a ‘boring’ business model, what is a utility to do?
The answer – pay out the bulk of cash flows as dividends. This results in a high payout ratio. Additionally, utilities tend to carry large debt burdens to increase return on equity and continue to build out their infrastructure. High debt burdens are serviceable thanks to utility’s stable cash flows.
While utilities typically pay out the bulk of their cash flows to shareholders as dividends, the next type of investments high yield investors should consider is actually required by law to pay out much of their income to unit holders.
Real estate investment trusts – REITs for short – tend to offer yields much higher than the ‘average’ stock. The largest REIT ETF (VNQ) currently has a dividend yield of 3.5%, versus just 1.8% for the S&P 500.
The yield of the largest REIT ETF (which is a good proxy for the REIT market in general) has a yield nearly twice as high as the S&P 500.
The currently high dividend yields of REITs is not an isolated occurrence. In fact, this asset class has traded at a higher dividend yield than the S&P 500 for decades.
REITs fall under a special type of legal business form designed primarily for businesses engaged in the real estate sector. Under this legal form, REITs are required by law to pay out 90% of their income as distributions to shareholders.
Thus, one of the primarily benefits of investing in these securities is their high dividend yields.
With most of their income going out to unitholders, REITs generate growth capital via tapping debt and equity markets. It is very common for REITs to slowly dilute their unit count over time as they raise money in equity markets by issuing new shares.
Also, REITs tend to have high amounts of debt. Debt is common in the real estate industry because its easier to raise. Simply put, banks are more willing to lend when there is a real asset (like real estate) backing the transaction.
The REIT sector is an excellent place to look for income-oriented investors in search of high yields. The next section of this article covers another type of equity investment known for high yields and required to pay out the bulk of income as distributions.
Master limited partnerships – or MLPs for short – are tax-efficient vehicles for returning cash to shareholders (even after the new Trump tax reductions).
MLPs are designed to be tax-efficient. Distributions are taxed at the individual level, not the business level. This avoids double taxation and means more money flowing to unit holders.
And, MLPs are known to take full advantage of favorable tax treatment. They typically pay out the vast majority of cash flows to unit holders. The largest MLP ETF is shown below to compare it to the S&P 500’s yield:
- Alerian MLP (AMLP) – 7.9% dividend yield
- S&P 500 (SPY) – 1.8% dividend yield
No, that isn’t a typo. The Alerian MLP yields 7.9% as of now. And its not designed to specifically seek out high yielding MLPs; it is a good proxy for the MLP market overall. The Alerian MLP Index pays out more than 4x as much as compared to the S&P 500. That’s not a bad deal for income oriented investors.
Due to MLPs unique legal structure, there can be consequences (though not typically) with holding these investments in retirement accounts. Potential MLP investors should discuss this issue with their accountant or tax preparer before investing heavily in MLPs in a retirement account.
The MLP industry is dominated by midstream energy companies. MLP might-as-well stand for ‘Mostly Liquid Pipelines’ because the vast majority of businesses employing the MLP structure are oil and gas pipelines. Pipelines operate a ‘toll road like’ business model, charging other oil corporations to transport oil through their pipelines. The economic benefit to society is that pipelines are much more efficient at transporting oil and gas than rail or truck.
3 Of The Safest High Dividend Stocks Today
High dividends now are a benefit, but what income investors really want is a mix of:
- High yield
- Safety and continuation of payments
- Income growth at least matching inflation (and preferably higher)
While there are no guarantees when it comes to investing in general, we believe the hand picked stocks below are the 3 most likely to provide a mix of the high, 5%+ income today, safety and continuation of dividend payments far into the future, and inflation-beating growth.
Safe High Dividend Stock #1: AT&T
AT&T (T) is a Dividend Aristocrat with 34 consecutive years of dividend increases, a 6.2% dividend yield, and a sustainable payout ratio of 58% of expected 2018 earnings-per-share.
In short, AT&T has everything an income investor should look for.
AT&T has a very long history; it can trace its roots back to Alexander Graham Bell and the late 1800’s. The company has changed significantly since that time through a dizzying number of transactions.
Today’s AT&T is a wireless telecommunications and content juggernaut with a market cap of $227 billion.
AT&T has made 2 large, transformative acquisitions in recent years. The company has acquired DirecTV, and more recently, Time Warner. AT&T is pushing to be a vertically integrated content company.
With its wireless services, AT&T provides connection to the internet for consumers ubiquitous smart phones and devices. Now, the company is adding the ability produce content with the Time Warner (which owns HBO and Turner, among others). This is likely to create a long growth runway for AT&T.
With that said, we don’t expect rapid growth at AT&T. Rather, sustained growth of between 4% and 7% a year is more likely. Sustained growth ahead of inflation combined with a current high yield and reasonable payout ratio gives AT&T shareholders an excellent chance of generating safe, growing income over the long run.
Safe High Dividend Stock #2: Phillip Morris International
Philip Morris International (PM) owns the rights to the Marlboro cigarette brand (among many others) outside the United States. The company was created when the ‘old’ Philip Morris split-off into a domestic company, Altria (MO), and an international company.
Both Altria and Philip Morris have reliably paid rising dividends over time, but only Philip Morris has a yield north of 5% today.
The cigarette industry is in decline, make no mistake. But Philip Morris’ management has known this for quite some time. The company has been developing its ‘reduced-risk’ heated tobacco system called iQOS for years. With iQOS now available and generating strong results (especially in Japan and South Korea), Philip Morris is returing to revenue growth.
Indeed, the company managed to grow its revenues 13% through the first half of fiscal 2018 versus the first half of fiscal 2017, despite declining cigarette volumes. Philip Morris’ future is not tied to cigarettes, but to people’s desire for branded nicotine products.
At its midpoint, Philip Morris management expects earnings-per-share of $5.07 in fiscal 2018. The company currently pays $4.56 in dividends per share, for payout ratio of around 90%.
While Philip Morris does sport a high payout ratio, the company generates stable cash flows – even during recessions. This makes the company’s dividend safe. With revenues rising, future dividend growth here is just as likely as people continuing to crave nicotine.
Safe High Dividend Stock #3: Royal Dutch Shell
Royal Dutch Shell (RDS-A), or more commonly, Shell, is a large diversified oil corporation.
While it isn’t the gold standard in the energy industry – that honor belongs first to Dividend Aristocrat Exxon Mobil (XOM) and then perhaps fellow Aristocrat Chevron (CVX) – it is in the upper echelon of quality for the sector.
Shell currently sports a market cap of $294 billion, making it the second largest publicly traded oil corporation, behind only Exxon Mobil. What really stands out about Shell is its dividend yield; the stock currently offers investors a 5.6% dividend yield.
Another standout fact about Shell; the company did not reduce its dividend during the Great Recession OR the multi-year period of low oil prices that only ended recently. In fact, the company remained profitable through both periods on a full fiscal year basis.
The recent period of low oil prices tested Shell’s management’s commitment to dividend payments… And the company passed with flying colors. Shell’s dividend payments exceeded its earnings in 2015, 2016, and 2017, and Shell did not reduce its dividend.
We expect earnings-per-share of $4.55 in fiscal 2018 for Shell. The stock currently pays out $3.76 in dividends per share, for an expected payout ratio of 83%.
Shell has proven that it has set its dividend in a conservative fashion and is unlikely to cut its dividend during periods of low oil prices. Conversely, shareholders can expect dividend growth when the price of oil is high and Shell’s earnings are growing.
Investing in high dividend stocks is a key strategy for generating income (and especially growing income) in today’s low interest rate environment.
This article provides you with a free, detailed spreadsheet to quickly identify high yielding stocks, REITs, and MLPs. But high yield investing should go beyond looking at yield alone.
Safety and growth are important as well. The Dividend Aristocrats, Warren Buffett’s holdings, lower payout ratio stocks with higher yields in general are all great places to look for a combination of safety, growth, and income.
If you are looking for more actionable information on high dividend stocks, see the video below: