The Highest-Yielding Dividends That Are Safe to Hold

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Dividend payments by S&P 500 companies reached an all-time high last year, totaling some $330.8 billion, according to FactSet. As of this March, 418 of the 500 companies in the index paid a dividend.

However, not all dividends are created equal. Of the 500 companies in the index, 96 pay their shareholders a dividend of 3% or more. As a rough comparison, a 10-year Treasury note yields close to 2.5%. While Treasury securities come with a virtual guarantee of a return of principal, share price appreciation is generally expected to provide higher returns. Dividends are intended to make those returns even better over time.

Dividends are considered among the most straightforward ways for a company to reward investors. After all, they represent a direct transfer of cash from the company back to its shareholders. However, a high dividend yield alone does not give a complete picture of the value of an investment. The financial health and business prospects of the company has to be considered as well. Investors need to be able to differentiate a high dividend from a safe dividend.

Some companies, like Chevron, can easily afford to offer investors a 3.5% dividend yield. While this is among the higher yields in the S&P 500, Chevron likely has the means to pay even more, since it is among the most profitable companies in the United States.

Surprisingly, some companies pay dividends even when they lose money. For example, Windstream Holdings, with a 10.4% dividend yield, actually pays out three times its trailing 12-month earnings in dividends. However, such a combination of high payouts and unprofitability is not sustainable.

To identify the highest-yielding S&P 500 stocks that are safe for investors, 24/7 Wall St. reviewed the companies that are currently paying dividends of 3% or more. While the three companies with the highest dividend yields in the S&P 500 are in the communications sector, none of them satisfied all of our screen criteria.

We excluded any company with a market capitalization of less than $10 billion. We also eliminated companies that we believe cannot afford to maintain their dividends or for which a net loss is expected. Many of the dividends and earnings figures are based on forward-looking analyst estimates.

We generally put a limit on the income payout rate at 80%, meaning that companies must retain 20% of their expected earnings this year and next year for other uses, such as share buybacks and growth opportunities. This excluded the real estate investment trusts (REITs), which pay out almost all income to maintain their special tax structures.

In some instances, companies do elect to cut dividends, even when the market does not expect it. This happened to one company that we previously thought offered a safe dividend, FirstEnergy. The company cut its dividend by a third last year, a decision many followers attributed to the unregulated energy sales part of its business.

Companies involved in transformative mergers or acquisitions were excluded if the combination could potentially place the dividend at risk. We did make an exception for AT&T, which acquired DirecTV. We independently determined at the time of the deal’s announcement that it was unlikely that AT&T’s dividend would be affected by the transaction. We also only included only two utility companies, which typically pay very high dividends, since this would have otherwise skewed our results largely towards that sector.

These are the highest-yielding dividends that are safe to hold.