It sounds like a broken record: Stocks keep hitting new highs and dividend yields continue to sink. Just look at the top dividend stocks in the S&P 500. The list didn’t change much since last month. It’s still dominated by the dividend stocks of telecommunications companies, deep-sea drillers and health-care real estate investment trusts.
But the dividend yields on these names are much lower now than they were in late spring. Indeed, as recently as March, the top dividend stock in the S&P 500 had a yield of more than 12%. As of September, the yield on that same stock — which is still No. 1 — fell below 9%.
The yields on these dividend stocks still stand out, however. For years now, decent yields on dividend stocks have been hard to find and that’s only gotten worse over the course of 2014. The dividend yield on the S&P 500 is down to 1.91% from 2.12% a year ago, according to data from Birinyi Associates. Given that backdrop, the top dividend stocks in the S&P 500 are practically fountains of income.
Dividend stocks with high yields need to be researched thoroughly before being bought. High yields can often be a sign of trouble. But if you’re looking for hefty yields, these 10 names are a good place to start. (Note: Dividend yields are as of Sept. 8.)
Top S&P 500 Dividend Stocks #10 — Health Care REIT (HCN)
HCN Dividend: 4.7%
Real estate investment trusts (REITs) are required to pay out most of their earnings as dividends in exchange for certain tax benefits, which is why so many of them make lists of top dividend stocks. And with a consistently high dividend yield, Health Care REIT (HCN) has become of the staples on our monthly list of dividend stocks.
Even better, HCN stock has been delivering on price appreciation, too. HCN stock is up nearly 27% for the year-to-date, beating the broader market by almost 20 percentage points.
HCN took advantage of a string of solid quarterly results — and a high share price — to sell more stock. That’s partly why it could afford to go on a recent acquisition binge that included scooping up HealthLease Properties REIT for $950 million in cash.
Top S&P 500 Dividend Stocks #9 — Teco Energy (TE)
TE Dividend: 4.9%
Teco Energy (TE) maintains its place among the top dividends stocks, but it gets no points for price appreciation. Shares have been range-bound between $17 and $18 for more than four months.
Indeed, TE stock is up less than 4% YTD, and has outperformed the broader market for only brief periods this year. The stock has even been negative on occasion.
For the most recent quarter, TE beat Wall Street’s bottom-line forecast, thanks to cost cuts. For longer-term price performance, TE stocks needs a string of beat-and-raise quarters to get moving again. Until then, the dividend yield will have to do the heavy lifting for total return.
Top S&P 500 Dividend Stocks #8 — HCP (HCP)
HCP Dividend: 5%
HCP (HCP) is another healthcare REIT with high dividends and proven defensive characteristics. Indeed, as a U.S. healthcare REIT, HCP stock is insulated from geopolitical troubles or European credit worries, helping it to zig when the market zags. A 29-year track record of rising dividends doesn’t hurt either.
At the same time, HCP’s fundamentals have been propelling shares higher. HCP stock is up 20% so far this year.
A beat-and-raise first quarter — helped by higher revenue, not cost cuts — has given HCP stock a nice tailwind. An improving outlook for all healthcare REITs bodes well for further gains this year.
Top S&P 500 Dividend Stocks #7 — AT&T (T)
T Dividend Yield: 5.3%
Telecommunications are another sector to look at for generous dividend stocks, even if telcos are making the headlines recently for industry consolidation.
The big news this year for AT&T (T) remains its offer to buy DirecTV (DTV), which should go through, pending regulatory approval. The deal was necessary to fend off competition from Comcast’s (CMCSA) plan to acquire Time Warner Cable (TWC).
A gusher of free cash flow makes is easy for T to make a nearly $50 billion acquisition and pay out very high dividends. Indeed, the blue chip always makes the list of top payers in the S&P 500. Price appreciation has been another matter. T stock is essentially flat YTD.
Top S&P 500 Dividend Stocks #6 — CenturyLink (CTL)
CTL Dividend: 5.3%
Here’s where we get to the most amusing part of our list. CenturyLink (CTL) is the one of three telecom stocks that always hit the top spots for dividend stocks with very high dividend yields and poor long-term price performance. (Gushers of free cash flow make the payouts possible.)
That said, things have been going great up for CTL stock lately. Shares are up 27% for the year-to-date, outpacing the S&P 500 by about 20 percentage points.
The upside in price has dropped the yield on CTL below 6%, but given that the stock is a big-time market-lagger for pretty much any time frame longer than 52 weeks, shareholders probably aren’t complaining.
Top S&P 500 Dividend Stocks #5 — Noble (NE)
NE Dividend: 5.6%
Deepwater drillers are having a tough year. Stagnant to declining energy prices are hurting demand and rates paid. That’s why Noble (NE) is off 30% for the year-to-date.
If there’s a bright spot, the poor price performance has lifted the dividend yield on Noble to 5.6%. At least anyone buying in at this levels will have a decent income stream while waiting for an upturn in the industry.
However, they may have to wait for some time. Noble’s latest fleet report showed the same problems of stagnant dayrates and soon-to-expire contracts. The technicals are working against NE stock too.
Top S&P 500 Dividend Stocks #4 — Frontier Communications (FTR)
FTR Dividend Yield: 6%
Yes, there are dividend stocks in the S&P 500 that yield at least 6%. Just look at Frontier Communications (FTR), the second of our regional telecoms with junk-bond-type yields.
FTR was a dog of a stock for ages, which partly accounts for its dividend yield. But cut to today, and FTR stock is having a incredible year. Indeed, it’s up a remarkable 44% so far in 2014.
FTR is focusing on retaining customers and cutting costs. Analysts think FTR will post profit increases in both 2014 and 2015. Either way, as a telecom, FTR enjoys a river of free cash flow, which helps ensure the fat dividends will keep coming.
Top S&P 500 Dividend Stocks #3 — Ensco (ESV)
ESV Dividend: 6.4%
As noted with Noble, weak energy prices don’t support more exploration, which means rates paid for deep-water rigs are under pressure.
Those weak industry fundamentals have shares in Ensco (ESV) down more than 17% so far this year. Offshore drilling stocks were thought to have put the worst of the selling behind them, but then ESV cratered in July — and there are few catalysts to get it moving again.
But with ESV stock sporting a dividend yield of more than 6%, at least shareholders are getting paid well while they wait for energy demand to bounce back.
Top S&P 500 Dividend Stocks #2 — Transocean (RIG)
RIG Dividend Yield: 8.1%
Like ESV, Transocean (RIG) is another offshore driller than can’t do much about stagnant energy prices — and its share price has been getting clobbered for it.
RIG is off more than 24% for the year-to-date. In addition to a lower rate (and margin) environment, RIG is getting hurt by a large number of rigs coming off contract. The company is in the midst of a restructuring, which will spin off eight rigs into a new, publicly traded company, but that won’t do much for the stock in the short term.
Every time RIG looks to have found a floor in 2014, it has managed to disappoint once again. That keeps upping the dividend yield, but the total return is still negative.
Top S&P 500 Dividend Stocks #1 — Windstream Holdings (WIN)
WIN Dividend: 8.8%
The long-reigning champ of S&P 500 dividend stocks, Winstream Holdings (WIN) wins once again — but the yields sure is falling in a hurry. Sure, at 8.8%, WIN stock still yields more than your average junk bond, but that yield was above 12% when the year started.
Investors are happy with the reason for the decline in yield, however. WIN stock is up 40% for the year-to-date. This long-suffering stock now has a positive five-year chart, having bounced back from lows not seen since the financial crisis.
Just be forewarned that Windstream is highly leveraged and pays out more in dividends than it makes in earnings. It does, however, generate more than ample free cash after paying interest expense, and that should keep the dividends coming.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
