Another month, another all-time high … and another drop in yields on dividend stocks.
No one’s complaining about price appreciation, that’s for sure. After stumbling out of the gate, the S&P 500 is up 5.5% for the year, crossing the psychologically reassuring level of 1900 for the first time and now charging toward 2000.
But as we’ve noted before, barring a huge increase in dividends paid, rising stocks prices mean lower yields on dividend stocks. Indeed, the market’s dividend yield stands at 1.93%, down from 1.96% a month ago — and 2.07% at this time last year.
Lower yields on dividend stocks pose a couple of risks. For one thing, anyone putting new money to work in dividend stocks is doing so at those now-lower yields. The other risk is that as yields on dividend stocks come down, they become less competitive vs. other sources of income, such as bonds.
Fortunately, there are some bright spots to falling yields on dividend stocks. The bond market is rising, meaning yields on fixed income are also falling. And, best of all, there are still plenty of dividend stocks in the S&P 500 throwing off fat yields.
Even after hitting new highs, the benchmark index includes dividends stocks yielding anywhere from about 5% to more than 10%.
To get a sense of what’s out there among high-yield dividend stocks, here are the top 10 S&P 500 dividend stocks for June. (Note: All dividend yields are as of market close June 6.)
Top S&P 500 Dividend Stocks #10 – Kinder Morgan (KMI)
Like many names in the energy industry — Kinder Morgan (KMI) operates oil and gas pipelines — stagnant-to-falling prices are weighing on the company’s shares. KMI stock is off 2% for the year-to-date, but it has turned up recently. Just a month ago, KMI stock was down more than 11% for the year.
Some analysts believe KMI stock has finally bottomed out, and although a rising share price lowers the yield for new money, KMI hiked its dividend two months ago to maintain its generous payouts.
What Kinder Morgan really needs is for demand for energy to pick up.
In the meantime, though, shareholders will have to make do with the hefty dividend.
Top S&P 500 Dividend Stocks #9 – Health Care REIT (HCN)
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 a staple of this monthly list of dividend stocks.
Just recently, HCN took advantage of a string of solid quarterly results — and a high share price, which is up 19% on the year — to sell more stock. The company garnered $1 billion from a secondary offering that not only bolstered the balance sheet, but also proved how popular HCN stock is these days.
Top S&P 500 Dividend Stocks #8 – Teco Energy (TE)
Teco Energy (TE) first broke into the top 10 S&P 500 dividend stocks in February, and it has stayed there with its generous yield … but the share price has been very fickle.
TE stock is up less than 2% YTD, giving up gains of as much as 6% in late April. TE stock also was off by as much as 6% back in February.
The utility sector is having a tremendous year, but TE stock hasn’t been participating. For the most recent quarter, TE missed earnings and revenue forecasts.
Simply put, if Teco isn’t going to be lifted by the waters buoying utilities generally, it needs some beat-and-raise quarters to get the stock moving again. Until then, the dividend yield will have to do the heavy lifting for total return.
Top S&P 500 Dividend Stocks #7 – HCP (HCP)
HCP (HCP) is another REIT that’s no stranger to the list of top dividend stocks. However, the yield on HCP has been like a slowly melting iceberg — even after a dividend raise. The yield has slipped from 5.8% as recently as March.
That’s because HCP’s shares are rallying, up 14% year-to-date, and it’s hard to get mad at HCP stock for putting up such strong price appreciation. Indeed, HCP is having an excellent year for a big dividend payer, putting up a gain of 14% so far in 2014 not including its two quarterly payouts.
A beat-and-raise first quarter — helped by higher revenue, not cost cuts — has given HCN stock a nice tailwind. Improving fundamentals for healthcare REITs bode well for further gains this year.
Top S&P 500 Dividend Stocks #6 – AT&T (T)
Telecommunications are another sector to look at for generous dividend stocks, even if telcos are making the headlines recently for industry consolidation.
As expected, AT&T (T) offered to buy DirecTV (TV), which will 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, and is the No. 1 among dividend stocks in the Dow Jones Industrial Average.
Top S&P 500 Dividend Stocks #5 – Ensco (ESV)
Another sector getting hurt by energy prices is the offshore drillers. Prices don’t support more exploration, which means rates paid for rigs are under pressure.
Those weak industry fundamentals have shares in Ensco (ESV) down nearly 8% so far this year. That said, ESV did manage to surpass analysts’ quarterly earnings forecast even as profits fell year-over year.
Offshore drilling stocks seem to have put the worst of the selling behind them, but there aren’t exactly screaming catalysts to get them moving again.
With a dividend yield of nearly 6%, at least ESV shareholders are getting paid well while they wait for energy demand to bounce back.
Top S&P 500 Dividend Stocks #4 – CenturyLink (CTL)
And now for the most amusing part of the list. CenturyLink (CTL) is the one of three telecom stocks that always hit the top spots for dividend stocks with their crazy-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 16% for the year-to-date, easily outpacing the S&P 500. The upside in price has dropped the yield on CTL below 6%, but given that the stock is a market lagger for any time frame of 52 weeks and longer, shareholders probably aren’t complaining.
Top S&P 500 Dividend Stocks #3 – Transocean (RIG)
Offshore driller Transocean (RIG) makes the top 10 dividend stocks for a fourth consecutive month. Unfortunately for anyone holding Transocean stock, the dividend yield propelled it into the top 10 only because the stock has fallen so far. RIG stock is down a painful 14% for the year-to-date, hurt by a large number of rigs coming off contract and the same pressure on rates paid that’s weighing on Ensco.
Happily for shareholders, however, is the fact that RIG appears to have found a bottom. Quarterly earnings beat Wall Street forecasts, and the market also likes the RIG restructuring plan, which will spin off eight rigs into a new publicly traded company.
Top S&P 500 Dividend Stocks #2 – Frontier Communications (FTR)
Once again, Frontier Communications (FTR) grabs the No. 2 spot for the top S&P 500 dividend stocks.
This long-suffering stock is having a incredible year, though, gaining 20% for the year-to-date. That comes in spite of a mixed first-quarter performance in which both earnings and revenue missed Wall Street projections.
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 #1 – Windstream Holdings (WIN)
WIN stock is a telecom that has posted some ugly longer-term returns. Lately, though, the rising stock price makes the five-year performance for WIN stock positive, having bounced back from lows not seen since the financial crisis.
Like CenturyLink and Frontier Communications, Windstream Holdings (WIN) is having an excellent year. WIN stock is up 22% so far in 2014. That has the yield falling below 11% — but so what? That still crushes even the highest-yielding junk bonds.
And like junk bonds, WIN is rather risky. Windstream is highly leveraged and pays out more in dividends than it makes in earnings. However, ample free cash flow after paying interest should keep the payouts coming.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.