Income investors are taking blows from all sides. Sure, they’ve become accustomed to paltry yields on bonds and savings products, but now stocks are making new all-time highs — meaning dividends yields are coming down.
Around this time last year, the dividend yield on the S&P 500 was 2.17%. That’s not even chicken feed, but hey, it still was a good half-percentage-point better than a 10-year T-note.
Cut to today, and the yield on the S&P 500 is down to 1.94%. The 10-year? Up to 2.75%.
The good news is that benchmark bonds are supposed to yield more than the broader market. The bad news is that yields on both asset classes are still pathetic. After all, the 10-year expected inflation rate is 1.73% — trivial on a historic basis, but it brings real dividend rates down to practically zilch. Once you factor in inflation, the yield on the S&P 500 comes to 0.23%.
Fortunately, plenty of individual stocks still throw off healthy dividend yields — and some are downright gushers of income — at least in this rate environment. So which stocks in the S&P 500 pay the highest dividend yields? Read on to find out:
Dividend Yield: 5.1%
The reigning dividend champ of the Dow Jones Industrial Average has a large enough payout to also land it among the biggest income stocks in the S&P 500, too.
AT&T’s (T) stock hasn’t done much this year — it’s up just 4% — but then, you don’t own a telecom for its price performance.
Solid financials and a stable user base mean the payouts will keep coming, but everyone — especially AT&T’s management — would like to have more growth too.
Mobile in the U.S. is essentially a saturated market, where the only thing the players can do is steal one another’s share or rollout pricier new features and products. That’s why AT&T has made no secret of its desire to do a big deal in Europe. So don’t be surprised if at some point — maybe soon — the U.S. telecom giant makes a huge acquisition splash across the pond.
Dividend Yield: 5.1%
Tobacco companies are expected to pay hefty dividends, so it’s especially pleasing that Altria (MO) is doing well on a price basis, too. Shares are up more than 19% for the year-to-date.
Third-quarter earnings were better than expected on surprisingly strong revenue growth, driven by price hikes for smokeless tobacco.
That helped Altria hike its dividend by more than 9% — the 47th such increase in the past 44 years.
#8: Health Care REIT
Dividend Yield: 5.1%
As a real estate investment trust, Health Care REIT (HCN) has to pay out most of its earnings as dividends, which is a good thing considering what a dog the stock has been this year. HCN is off 1.4% so far in 2013.
True, HCN enjoys a solid portfolio of senior housing, long-term care and medical office facilities — but an acquisition spree has greatly increased costs, and there’s concern in some quarters that the board and the CEO don’t see eye-to-eye.
Dividend Yield: 5.2%
Entergy (ETR) posted better-than-expected third-quarter results, but shares in this electric utility haven’t done much this year. The stock is down 1% in 2013.
It’s not really Entergy’s fault, even though expenses are on the rise and a planned spinoff of its electric-transmission business was pushed into next year.
Rather, it’s just a bad time to be a utility — especially an electric company — in a world of record-low natural gas prices. Indeed, the entire utility sector of the S&P 500 is lagging the broader market by about 10 percentage points so far this year.
Behind all the noise in the most recent results was the happy fact that Entergy posted higher revenue — no mean feat in the current price environment. And you don’t have to worry about the dividend. Solid cash flow means you can bank on those generous payouts.
Dividend Yield: 5.3%
HCP (HCP) is having an ugly year. The stock is off more than 12%, lagging the broader market by a dozen percentage points.
That’s partly due to the same forces afflicting many real estate investment trusts, like Health Care REIT mentioned above. These stocks had huge runs last year, and fears that the Federal Reserve could start tapering its bond-buying program spurred investors and traders to lock in profits.
Longer-term, the outlook is just fine for HCP. Like the competition, it’s active on the acquisition front, which loads up costs now for returns on capital later. It also operates in a sector that has tailwinds for the next 20 years or so, as the baby boomers enter their dotage.
In the shorter-term, HCP’s decent balance sheet and improved credit profile mean the dividends will keep coming.
#5: Pepco Holdings
Dividend Yield: 5.6%
Like Entergy, Pepco (POM) has been at the mercy of market forces more than usual this year, leaving shares down 2% so far in 2013.
It’s tough to be an electric utility at a time of rock-bottom prices for natural gas. It also doesn’t help that the market is punishing dividend stalwarts like REITs and utilities over fears the Fed could taper its bond-buying program. The resulting rise in bond yields has made dividend stocks somewhat less attractive.
Beyond that, Pepco didn’t wow anyone with its latest earnings report. Earning were up, but revenue was down — and the company essentially cut its full-year outlook. Unseasonably mild weather did take a toll on sales of electricity, but at least Pepco managed to grow profits by lowering operating and maintenance costs.
Most importantly, Pepco is good for its dividend, especially with a cash pile that more than doubled to $75 million in the most recent quarter.
Dividend Yield: 5.9%
Yup, FirstEnergy (FE) is another electric utility, and as we’ve seen with this sector, ultra-low prices for natural gas and Fed taper anxiety are pressuring stocks this year.
As for FirstEnergy, shares are off more than 11% in 2013, but — on the bright side — that does make the dividend yield higher for new money, currently reaching a whopping 5.7%.
That said, FirstEnergy did have a lousy third quarter. True, earnings beat Wall Street estimates, but net income still plunged by almost half because unusually cool summer weather meant customers went without air conditioning.
The company also slashed its full-year guidance, which is never good for the share price, at least in the short term. That’s of no consequence to the dividend, however. Indeed, FE’s cash on hand increased to $222 million from $172 million at the end of last year.
Dividend Yield: 6.9%
CenturyLink (CTL) is having a horrible year. Its stock price has fallen nearly 20% in 2013. But, happily for new investors, that has pushed the yield on the dividend — at 6.9% — up to silly levels.
The telecom company — until recently a member of the S&P Dividend Aristocrats — wrote off a whopping $1.1 billion for goodwill in the latest quarter because its data housing business is something of a dud.
But lest you think CenturyLink has no hope of growth, it is quietly making good with its Internet-based TV broadcast service. Known as Prism, the service has reached almost 150,000 paying households in less than three years. It also allows CenturyLink to upsell customers to a triple-play package of broadband, landline and cable services.
For now, however, profit growth will be slim. Wall Street expects the company to grow full-year earnings per share by just a penny this year — and by another penny in 2014.
#2: Frontier Communications
Dividend Yield: 8.5%
Another regional telecommunications company, Frontier Communications (FTR), has an ugly longer-term chart, and shares are up just 11% so far this year. The 8%-plus yield, however, makes it a star of equity income names.
Heavy competition and the erosion of its key small-business customer in a sluggish recovery are among the biggest culprits for the lagging stock price, but those days might be coming to an end.
Frontier’s turnaround strategy is taking shape as it lures new customers with low-risk “no contract” offerings. It’s also shoring up its balance sheet by shedding debt. And, as we noted recently, Frontier has a long-term growth forecast of 22%.
The hefty dividend sure makes it easy to wait for the turnaround to take hold.
Current Dividend Yield: 12%
Windstream (WIN) boasts an absolutely ridiculous yield. The No. 1 dividend stock in the S&P 500 has a current yield of roughly 12%. Even junk bonds don’t throw off that kind of income — the yield on the Barclays Aggregate U.S. Corporate High Yield index is just 5.8%!
Of course, investors need that juicy yield to offset sluggish share performance. The stock is off 3% for the year-to-date.
The amazingly high yield also helps mitigate some of the risk associated with less-than-stellar operations. The regional telecom had a weak third quarter, hurt by the loss of digital TV and voice services.
True, the super-high dividend is Windstream’s claim to fame, but be forewarned that the company is highly leveraged and pays out more in dividends than it makes in earnings.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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