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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Many dividend investors automatically ignore high yielding dividend stocks because they assume that such high yields are too good to be true but there is much more to evaluating a dividend stock than just looking at its yield. Intelligent investors will look not only at a stock’s yield, but also at its payout ratio or the ratio of dividend payments to net earnings. Words: 606

In further edited excerpts from the original article* eChristian Investing (www.eDividendStocks.com) goes on to say:

The average yield of dividend stocks in the Dow Jones index is now 2.9%. The S&P 500 sports 15 stocks with dividend yields above 6%. Those are pretty attractive yields for income investors, given that a money market account currently offers less than a 1% return.

A high dividend payout ratio is typically a warning sign that the current dividend level is unsustainable but below are details on 5 dividend stocks that have impressively high yields but also have very deceiving payout ratios in that they have sufficient free cash flow to maintain such dividend payment levels.

1. Qwest Communications (Q)
Qwest offers dividend investors an impressive 6.9% dividend yield. Wall Street expects that net earnings will decline by 10% this year, pushing the stock’s dividend payout ratio to 94%. However, the company generated nearly $2 billion in free cash flow in 2009 and has very impressive EBITDA margins (36% in the fourth quarter). With a manageable dividend/free cash flow ratio, Qwest should be able to maintain their dividend payout despite Wall Street’s expectations of further revenue declines in 2010 and 2011.

2. Frontier Communications (FTR)
Frontier Communications is the highest yielding stock in the S&P 500 with an amazing 13.7% dividend yield. The telecom stock is in the midst of acquiring assets from Verizon (VZ) in an $8.6 billion deal. The dividend reduction along with the Verizon transaction will significantly improve their dividend payout ratio from their current 175% level, but will still offer investors an amazing 10% dividend yield.

3. Windstream (WIN)
Windstream is the second highest yielding dividend stock in the S&P 500 with a 9.6% dividend yield. While the company’s annual dividend payout of $1.00 per share exceeds their anticipated net earnings of $.85 per share, the telecom stock is only expected to pay out 55% of their free cash flow in 2010. Wall Street also expects the stock to grow earnings in both 2010 and 2011.

4. Paychex (PAYX)
Paychex currently offers investors a respectable 4% dividend yield, but at the same time they are using 93% of their net earnings to fund their dividend payment. However, Wall Street expects the company’s earnings to grow by 8% in 2011. Though the labor markets are still a long way from full recovery, investors are recognizing that the Paychex outlook is much brighter than it was just a few quarters ago.

5. Verizon (VZ)
While Verizon may be the second highest yielding dividend stock in the Dow Jones index, declining earnings in 2010 could put pressure on the company’s high dividend. However, given the company’s strong dividend history we believe a dividend cut is unlikely from Verizon – despite a dividend payout ratio that is now above 80%. A costly marketing battle with AT&T (T) could prevent Verizon from increasing their dividend this year, but the chances of a dividend cut are slim.

When evaluating dividend stocks, free cash flow is often a much better measure to look at than net earnings. Without looking at a company’s cash flow, you can often be ignoring great dividend stocks. A high dividend payout ratio certainly shouldn’t preclude you from doing further analysis on a great dividend opportunity.

*http://seekingalpha.com/article/192523-five-quality-dividend-stocks-despite-high-payout-ratios?source=article_sb_popular

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
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