The number of companies paying dividends in the S&P 500 is at a 15-year high. According to FactSet, just over 80 companies in the index do not pay dividends. Paying dividends has become more attractive for companies of all sizes.
However, not all dividends are created equal. Of the 500 companies in the index, 99 pay their shareholders a dividend of 3% or more. By comparison, a 10-year Treasury note yields 2.66%. While Treasury securities come with an implied guarantee of a return of principal, share price appreciation of these companies also is expected to provide additional positive returns. Dividends are intended to make those returns even better over time.
Dividends are considered among the most straightforward measures of capital returns. After all, they represent cash going back into the hands of investors directly from the company. However, a high dividend yield does not give a complete picture of the value of an investment. The health of the company also has to be considered. Investors need to be able to differentiate a high dividend from a safe dividend.
Some companies, like ConocoPhillips (NYSE: COP), can afford to offer investors a 3.9% dividend yield. While its dividend is among the highest in the S&P 500, ConocoPhillips likely could pay out even more, since it is among the most profitable companies in the country.
Surprisingly, some companies pay dividends even when they lose money. For example, Windstream Holdings Inc. (NYSE: WIN), with a 12% dividend yield, actually pays out dividends of more than twice its earnings. However, the combination of high dividends and unprofitability are not sustainable if the economy hits another bump in the road.
To identify the highest-yielding S&P 500 stocks that are safe for investors, 24/7 Wall St. reviewed the 99 S&P 500 companies that are currently paying dividends of 3% or more. While the three highest dividends in the S&P 500 are in communications, none satisfy all of our screen criteria.
We excluded any company with a market capitalization of less than $10 billion. We also eliminated companies projecting a net loss or that cannot afford to maintain those dividends. Many of the dividend and earnings figures are based on forward-looking analyst estimates.
We 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.
Companies involved in transformative mergers were excluded. This gives the companies and analysts time to normalize their financial figures again before determining dividend safety. We also only included four utilities companies, which typically pay very high dividends, since this would have otherwise skewed our results largely towards that sector alone. As a final screen, we required that stocks possess upside potential from sources other than dividends, based on Thomson Reuters’ consensus one-year price targets for each company.
These are the highest-yielding dividends that are actually safe to hold.