Only 2 High Yield S&P 500 Dividend Stocks are Sound Investments

It would seem these days that, with bonds, CDs and money market funds paying less than the rate of inflation, serious consideration should be given to S&P 500 stocks that high dividend yields. The number are few (17) but when you take into account the dividends paid out relative to earnings, the extent and consistency of dividend growth over the years and trading at a relatively low price to earning ratio the choices only 2 make the cut. www.munKNEE.com; By: Lorimer Wilson; Words: 740

a) Dividend Yield
First let’s look at those stocks with high dividend yields. There are currently only 17 stocks with dividend yields of 5.7% or more which represents only 3.4% of the total number of stocks in the S&P 500. Of those only 11 have dividend yields of 6% or more. Below is the list of such stocks:
1. Frontier Communications Corp (FTR) 9.7%
2. Windstream Corporation (WIN) 8.9%
3. CenturyTel, Inc. (CTL) 8.1%
4. Pitney Bowes Inc. (PBI) 7.4%
5. Verizon Communications Inc. (VZ) 6.5%
6. Reynolds American, Inc. (RAI) 6.4%
7. AT&T Inc. (T) 6.4%
8. Altria Group, Inc. (MO) 6.2%
9. First Energy (FE) 6.1%
10. Health Care REIT, Inc. (HCN) 6.1%
11. Pepco Holdings, Inc. (POM) 6.1%
12. Progress Energy, Inc. (PGN) 5.9%
13. Cincinnati Financial Corporation (CINF) 5.9%
14. Ameren Corporation (AEE) 5.7%
15. Qwest Communications International Inc. (Q) 5.7%
16. Duke Energy Corporation (DUK) 5.7%
17. Lilly, Eli (LLY) 5.7%

b) Payout Ratio
Please keep in mind, however, that dividends are paid from earnings and, as such, should be a modest percentage of earnings. This relationship is known as the payout ratio and is calculated by dividing the dividend by the company’s net income. The payout should be less than 60% for nearly all stocks except qualifing utilities, publically traded partnerships, and real estate investment trusts. On that basis only 2 of the above stocks qualify with dividend payout ratios as follows:
1. Lilly, Eli (LLY) 50.7%
2. First Energy (FE) 56.4%

c) Dividend Growth
The next questions you should ask yourself are related to dividend growth and specifically:
a) has the company has failed to raise its dividend for one year and
b) has the company cuts its dividend in the past year or, to put it in other terms
c) has the company’s dividend grown year after year for the past 5 years.

For the conservative dividend investor failure of a company to raise its dividend is a red flag unless such a failure is related to spending in order to have greater revenues in the future while dividend cuts are seen as the kiss of death for the price of the company’s stock. Below are the above 2 companies according to their 5 Year Dividend Growth Rate:
1. FirstEnergy (FE) 8.0%
2. Lilly, Eli (LLY) 6.2%

d) Price to Earnings Ratio
Last but not least is each stock’s price to earnings (P/E) ratio. A ratio above 15:1 suggests that the stock is overpriced unless it is a major growth stock while a ratio below 5:1 would suggest the the stock is underpriced for some apparent reason. At both extremes further review should be undertaken to understand the situation better to help you make truly informed decisions as to whether they should be purchased or not. The P/E ratios for the above 2 companies are as follows:
1. FirstEnergy (FE) 11.1%
2. Lilly, Eli (LLY) 8.5%

Conclusion
There you have it! Out of 17 stocks with substantial dividend yields only 2 stocks – FirstEnergy and Eli Lilly – have payout ratios that suggest that the dividends are not in jeopardy, have dividends that continue to grow consistently over time and prices relative to their earnings that suggest that the stocks are not over-priced at their current levels.

Disclosure:
The above analyses do not preclude that there are certain aspects of their financial situation, management or business plans that might hamper their earnings growth over the years to come. As such, and you have heard it all too often before, you must do your own extensive due diligence before making any buying decision and I urge you to do just that. Please look at the analyses in this article as giving you a head start in your own due diligence and not as a recommendation to buy. For the record I do not own either of said stocks as I have my monies deployed elsewhere to achieve different objectives than generating high yields.

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