The yield on the S&P 500 has recovered nicely over the last 52-weeks, and now that the Federal Reserve at long last kicked off a tightening cycle, income investors can actually look forward to even higher yields on dividend stocks going forward.
If past is prologue, dividend investors have a chance to buy into higher yields in the quarters ahead. Based on earlier tightening cycles, dividend stocks can be expected to lag on a price basis over the next 10 months or so, at least according to Ned Davis Research.
As every equity income investor knows, lower prices equal higher yields on dividend stocks. Be forewarned that the S&P 500 dividend stocks with the highest yields aren’t automatic buys in such an environment. Indeed, a fat yield can be an indicator of a sick stock.
But it’s nonetheless interesting to see what the ceiling is for dividend stocks in the benchmark index. This is essentially the most dividend investors can expect from the market’s largest, most liquid equites.
With the Fed in tightening mode, the already insanely high yields on these 10 S&P 500 dividend stocks should become even more generous. If you’re looking to get as much yield as you can, keep an eye on these stocks.
Top S&P 500 Dividend Stocks #10: HCP, Inc. (HCP)
HCP Dividend Yield: 6.18%
Shares in real estate investment trusts like HCP, Inc. (HCP) typically come under pressure as interest rates rise. They really shouldn’t, but as dividend stocks, REITs compete with bonds for investors dollars.
That’s partly why HCP stock is down about 18% YTD. To add to the gloom, analysts have concerns about a glut in senior housing.
The price action is ugly, but the dividend is certainly safe. HCP is a member of the S&P Dividend Aristocrats, which is a collection of stocks that have raised their dividends every year for at least a quarter of a century.
Top S&P 500 Dividend Stocks #9: ConocoPhillips (COP)
COP Dividend Yield: 6.56%
The energy sector is known for its generous dividends, and the rout in oil prices is crushing shares and sending yields through the roof. That’s why so many names from the industry show up on this list.
In the case of ConocoPhillips (COP), the No. 2 oil major has lost more than 34% for the year-to-date. With Goldman Sachs predicting $20 oil next year, the COP yield could easily continue to rise.
One danger of dividend stocks in the energy sector is that they could cut their payouts. We’ve already seen this happen with a handful of names, but that’s a remote risk for COP, which has never reduced its dividend.
Top S&P 500 Dividend Stocks #8: Murphy Oil Corporation (MUR)
MUR Dividend Yield: 6.42%
The scary thing about COP’s precipitous fall is that diversified oil company are supposed to have at least some insulation from lower oil prices because it benefits their downstream operations.
Exploration and production companies like Murphy Oil Corporation (MUR) have no such luck. MUR stock has lost more than 55% so far this year and the outlook for oil prices suggests it has farther to fall. If you buy this for the dividend, you’re not going to see positive total returns for … well, who knows how long.
Happily for dividend investors, as troubled as MUR might be, it’s a another company that has never slashed its payout.
Top S&P 500 Dividend Stocks #7: Spectra Energy Corp. (SE)
SE Dividend Yield: 6.45%
Surprise, surprise, yet another energy sector name is carrying a yield that’s not far off from junk bond levels.
Pipeline operator Spectra Energy Corp. (SE) was supposed to be safe from the drop in energy prices. After all, pipeline companies don’t actually own any oil or gas. They just take a toll for transporting and storing them.
Unfortunately for this industry, the market hasn’t embraced that logic: SE stock has lost nearly 40% so far this year, and is now trading at levels last seen in 2010.
Sure, the company has never slashed its dividend, but a good case can be made that it can’t afford this kind of payout.
Top S&P 500 Dividend Stocks #6: Iron Mountain Inc (IRM)
IRM Dividend Yield: 7.14%
Iron Mountain Inc (IRM) thought it was being pretty clever when it converted to a real estate investment trust last year, but REIT performance has been disappointing in 2015.
Making matters worse, the document-storage giant has company-specific problems. Shares went into free fall at the start or summer when an analyst downgraded it to “underperform” (sell) because of a “chronic cash shortfall.”
It’s now off 30% YTD.
A chronic cash shortfall should set off alarms when it comes to the sustainability of the IRM dividend. If your strategy is to wait out price depreciation in a stock, it is absolutely imperative that the dividend remains safe.
Top S&P 500 Dividend Stocks #5: Seagate Technology PLC (STX)
STX Dividend Yield: 7.43%
It’s no longer unusual for technology stocks to pay dividends, but the yield on Seagate Technology PLC (STX) stock is getting ridiculous. You can chalk that up to the crash in the STX share price, off nearly 50% so far this year.
Sentiment on STX stock has turned sour for a number of reasons: Margins are under pressure, there are indications that its losing market share in enterprise and rivals Western Digital (WDC) and SanDisk (SNDK) agreed to a merger.
It also doesn’t help that the PC business is gradually receding.
Top S&P 500 Dividend Stocks #4: CenturyLink (CTL)
CTL Dividend Yield: 8.5%
Our old friend CenturyLink Inc (CTL) always makes a list of highest paying S&P 500 dividend stocks. Hey, the telecommunications sector is supposed to be a fountain of dividends, and this regional player hates to disappoint.
Too bad the only thing making the CenturyLink dividend more attractive is a slumping stock price. Shares are down about 37% YTD.
True, CTL is investing heavily in building out its broadband service, but a dwindling legacy business and higher costs rightfully scare the market.
It’s also important to keep in mind that CTL hasn’t raised its dividend for 12 consecutive quarters, and it even reduced its payout back in 2013.
Top S&P 500 Dividend Stocks #3: Frontier Communications Corp (FTR)
FTR Dividend Yield: 8.77%
Not to be outdone, regional telco Frontier Communications Corp (FTR) is another dividend-payer with a spit-take yield.
Like CTL, FTR stock is having a bad year — shares have lost about 30% so far. Another way in which these companies mirror each other is that they have both been poor long-term holdings, shedding roughly half of their values over the last five years.
Be that as it may, FTR has a reliable dividend with a 10-year-plus history of uninterrupted payouts. Ample cash flow and a decent balance sheet should keep that streak alive, but given the record of the share price, it might not be worth it.
Top S&P 500 Dividend Stocks #2: Williams Companies Inc (WMB)
WMB Dividend Yield: 12%
The energy infrastructure industry is coping with the rout in energy prices by engaging in mergers and acquisitions.
That’s why Williams Companies (WMB) agreed to sell itself to Energy Transfer Equity (ETE) three months ago, so we won’t be seeing this ticker after the deal closes in the first half of next year.
For now, however, the natural gas pipeline operator throws off a double-digit dividend yield.
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. By the way, ETE — which is not in the S&P 500 — has a yield of more than 10%.
Top S&P 500 Dividend Stocks #1: Oneok, Inc. (OKE)
OKE Dividend Yield: 11.6%
As the general partner of natural gas transport and storage company Oneok Partners LP (OKS), Oneok, Inc. (OKE) is getting dragged down by the slump in crude oil prices.
As noted above, pipeline companies should be in better shape than other energy players in the current industry downturn, but that’s of little comfort to anyone holding OKE, which is off about 50% for the year-to-date.
Despite its travails, the OKE dividend appears safe for now. And not long ago, OKE reaffirmed its outlook for cash flow available for dividends and free cash flow. It also intends to get its payout ratio back above 1 in 2016.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
