Top 10 S&P 500 Dividend Stocks for October

Dividend stocks got a lift from a poor jobs report, pressuring yields

Dividend stocks caught a rare break when the September payrolls report landed ugly.

best dividend stocks bank stocksThe market took it as a sign that the Federal Reserve would delay any hike interest rates. Expectations of a rate hike have been weighing on dividend stocks and other income-producing securities all year.

Dividend stocks are also getting hit by the collapse in oil prices because the energy sector has an abundance of them

That’s partly why the dividend yield on the S&P 500 is up year-over-year. Like bonds, yields and prices on dividend stocks move in opposite directions. A year ago, the dividend stocks in the broader market had a dividend yield of 2.01%, according to Birinyi Associates via the Wall Street Journal. Today, the yield is up to 2.18%.

With dividend stocks under pressure, new money can capture higher yields, but at a potential price. After all, if dividend stocks continue to fall, share-price declines can easily offset and return from payouts.

The bottom line is that it’s an especially tricky time to invest in dividend stocks even as yields remain low on an historical basis.

True, new money can take advantage of some truly huge yields at current levels and perhaps find some bargains too, but it has to very careful out there. A high yield is often a sign of a sick dividend stock.

To get a sense of what’s out there, here are the dividend stocks with the highest yields in the S&P 500 as of the Oct. 12 market open:

Top S&P 500 Dividend Stocks #10: Garmin Ltd. (GRMN)

Top S&P 500 Dividend Stocks #10: Garmin Ltd. (GRMN)GRMN Dividend Yield: 5.5%

Garmin (GRMN) makes the list of S&P 500 dividend stocks with the highest yields for a second straight month in pretty much the worst possible way: a continued share slide.

GRMN stock has lost 20% in the past three months as the market becomes increasingly worried about its future in a crowded and fast-moving industry. Among its many issues, Garmin is dealing with market-share loss in personal navigation devices, increased competition in the fitness segment and the stronger dollar.

Annual earnings per share are forecast to fall to $2.62 a share from $3.10 a year ago on essentially no revenue growth.

As we noted last month, new money can get into a fat yield, but it might want to wait. GRMN stock looks like it has room to fall.

Top S&P 500 Dividend Stocks #9: AT&T Inc. (T)

Top S&P 500 Dividend Stocks #9: AT&T Inc. (T)AT&T Dividend Yield: 5.7%

Blue-chip AT&T (T) always makes the list of S&P 500 dividend stocks with the highest yields and it’s probably the only name name we can recommend without reservation.

No, you don’t own AT&T expecting boffo stock-price performance. Rather, it’s a battleship of a dividend payer with ample cash flow, so you hold it more for the income.

Additionally, you own T for its defensive characteristics. This telecommunications stock is down for the year-to-date, but it’s holding up better than the broader market by more than a percentage point.

That’s what T is supposed to do.

With a generous, dependable dividend and an ability to add ballast to a portfolio, T is about as solid a widows-and-orphans stock as you can find.

Top S&P 500 Dividend Stocks #8: HCP, Inc. (HCP)

Top S&P 500 Dividend Stocks #8: HCP, Inc. (HCP)HCP Dividend Yield: 5.8%

Shares in real estate investment trusts like HCP (HCP) come under pressure when the Federal Reserve hikes rates. That’s why shares starting rising after the latest jobs report proved to be a stinker.

HCP is still down 11% year-to-date on expectations of a Fed rate hike, but the market’s giving it a reprieve now that the central bank looks like it will push any move into the future.

Of course, this can’t last. A tightening cycle is coming — it’s just a question of when.

Dividend stocks in general get hurt by higher rates because they compete with bonds for investors’ dollars. REITs take a disproportionate beating because paying out a majority of earnings as dividends is what they’re all about.

New money can get a yield of roughly 6%, but it needs to be patient on share price gains.

Top S&P 500 Dividend Stocks #7: Iron Mountain Inc (IRM)

Top S&P 500 Dividend Stocks #7: Iron Mountain Inc (IRM)IRM Dividend Yield: 6%

Iron Mountain (IRM) is getting hammered partly because it’s a REIT, but IRM has plenty of company-specific problems too.

IRM went into free fall at the start or summer when an analyst downgraded it to “underperform” (sell) because of a “chronic cash shortfall.” The plunging price also forced IRM to renegotiate its deal to purchase an Australian counterpart.

If that wasn’t enough, IRM missed quarterly revenue estimates due to fluctuations in recycled paper prices, the stronger dollar and online alternatives to stored records.

Iron Mountain as been in an uptrend for about a month now, but it’s still down 18% for the year-to-date and it won’t be surprising if this relative rebound stalls out soon.

Top S&P 500 Dividend Stocks #6: Williams Companies Inc (WMB)

Top S&P 500 Dividend Stocks #7: Williams Companies Inc (WMB)WMB Dividend Yield: 6.1%

Like dividend stocks and REITs, master limited partnerships don’t do well when rates are expected to rise. To make matters worse for Williams Companies (WMB), it operates natural gas pipelines at a time when energy stocks are getting slammed by the drop in oil prices.

The energy infrastructure infrastructure is coping through merger and acquisitions, which is why WMB agreed to sell itself to Energy Transfer Equity (ETE) for roughly $38 billion.

In addition to a special dividend to be paid to WMB shareholders before the deal closes, they can look forward to a generous stream of distributions.

ETE currently sports a dividend yield of 4.5%. If you’re comfortable with the risks with energy MLPs, Williams (via ETE) could be a good way to up your income.

Top S&P 500 Dividend Stocks #5: Kinder Morgan Inc (KMI)

Top S&P 500 Dividend Stocks #6: Kinder Morgan Inc (KMI)KMI Dividend Yield: 6.2%

Here’s another beaten-down energy infrastructure play.

Kinder Morgan’s (KMI) yield is high, but only because shares have collapsed. Indeed, they’re down 25% for the year-to-date even after a big rally after the bad jobs report.

As welcome as the bounce was, interest rates are still going up eventually, and the outlook for higher oil prices isn’t pretty.

As the operator of a vast network of oil and gas pipelines, Kinder Morgan is as vulnerable as any company in the sector. KMI insists that the price of oil has no bearing on results — it’s a toll-taker on the movement of natural gas and oil — but the market doesn’t see it that way.

Some would argue that KMI is bargain-basement cheap, and that’s probably the case … if you can wait for oil prices to reverse the trend.

Top S&P 500 Dividend Stocks #4: Oneok, Inc. (OKE)

Top S&P 500 Dividend Stocks #4: Oneok, Inc. (OKE)OKE Dividend Yield: 6.11%

Oneok (OKE) is in the energy sector, so there’s little wonder as to why the dividend yield is within shouting distance of 7%.

As the general partner of natural gas transport and storage firm Oneok Partners LP (OKS), OKE is getting dragged down by the oil-price slump.

Sure, analysts say gas utilities should be in better shape than other energy players in the current industry downturn, but that’s of little comfort to anyone holding Oneok, which is off about 22% for the year-to-date. A big post-jobs-report bounce seems to have run its course.

That said, the dividend appears safe for now. Not long ago, OKE reaffirmed its outlook for its cash flow available for dividends and free cash flow.

Top S&P 500 Dividend Stocks #3: Mattel, Inc. (MAT)

Top S&P 500 Dividend Stocks #3: Mattel, Inc. (MAT)MAT Dividend Yield: 6.7%

Mattel (MAT) has been a miserable stock for a year-and-a-half and now it has another indignity to suffer: Privately held Lego has surpassed it as the world’s largest toymaker.

That doesn’t matter to operational performance, sure, but it does underscore MAT’s many woes.

Among the troubles: Key products lines like Barbie are suffering declines in revenue. MAT lost some key licenses. And, of course, there’s the negative effects of a stronger dollar.

Some analysts see hope in new product launches, including a wireless Barbie doll that uses voice recognition to chat with girls.

If MAT doesn’t bounce back with a good holiday selling season, its 27% YTD decline will only get wider. Sure, that makes a big yield for new money, but further share-price declines could very well wipe that out and then some.

Top S&P 500 Dividend Stocks #2: Frontier Communications Corp (FTR)

Top S&P 500 Dividend Stocks #2: Frontier Communications Corp (FTR)FTR Dividend Yield: 8.1%

Here we go again. Regional telecoms have habit of leading the list of the S&P 500’s top-paying dividend stocks, and this month is no exception. Frontier Communications (FTR) traded places with CenturyLink (CTL) last month thanks to some recent relative outperformance.

Be that as it may, FTR is still down 23% for the year-to-date. It has been a terrible long-term holding as well, not just via share declines but also through a dividend payout that declined from 25 cents quarterly as recently as 2010 to its current 10.5 cents now.

FTR has made progress in adding broadband customers, but the core business of landline service has zero chance of material growth.

Be that as it may, free cash flow isn’t a problem right now, which should keep FTR’s insanely high dividend intact.

Top S&P 500 Dividend Stocks #1: CenturyLink (CTL)

Top S&P 500 Dividend Stocks #1: CenturyLink (CTL)CTL Dividend Yield: 8.4%

For a second straight month, CenturyLink (CTL) has the highest yield of any dividend stock in the S&P 500. Investors can thank (or blame) a year-to-date plunge of 35% in the share price for that.

That’s what happens to regional telcos as customers continue to ditch their landlines. True, CenturyLink is investing heavily in building out its broadband service, but a dwindling legacy business and higher costs rightfully scare the market.

The good news is that despite the high yield, CTL has always been good for it in the past. A high dividend yield is usually a warning sign, but CenturyLink has the gushers of free cash flow to back it up.

Be forewarned, however, that CTL has a dismal record as a long-term holding even on a total-return basis. A price drop could easily wipe out the return from the dividend yield, and more.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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