Dividend payments in the S&P 500 keep setting new all-time highs. As of October, roughly 425 S&P 500 members paid dividends. The dividend yield for 98 of these companies was north of 3%. Still, not all dividends are created equally.
Some companies may have high dividend yields because their share price declined recently. At other companies, high dividend yield may be a sign of stability and safety. These dividend payments are not only unlikely to be cut or skipped in the near future, but rather raised for years into the future. 24/7 Wall St. identified the safest of the high dividend yield stocks in the S&P 500.
Income investors may opt for a Treasury note and its virtual guarantee of principal. But many investors want a higher yield than that of a Treasury security, as well as the potential for greater payments and capital appreciation in the years ahead. Further, interest rates have been set to rise for over a year now, but the 10-year Treasury yield is still currently just under 2.50%.
While many companies use stock buybacks, dividends are still the most direct method of returning capital to shareholders. Companies can repurchase stock simply because they have some extra cash on hand and the stock price may warrant it. Raising the dividend, on the other hand, implies that companies have visibility and confidence in their businesses for years into the future. To be considered a safe dividend, a stock’s current payout has to be within the means of the company’s current cash and earnings.
It turns out that only one of the 10 highest yielding S&P 500 stocks also made the list of the safest dividends — AT&T. The safest dividends do not usually have very high yields in the 8% to 10% range — such yields are often risky and the payments in danger of being slashed. While we used a market capitalization floor of $10 billion, all of the high yielding stocks with safe dividends have much larger market caps.
Companies that will likely not be able to afford their dividends in the years ahead were screened out as well. A dividend payout ratio of 80% of earnings was generally used as a bar, so that companies can retain some earnings for growth opportunities or stability ahead. REITS and similar pass-through structures were automatically excluded due to guidelines on having to pay out almost all of their income and due to potential fluctuations in those payouts.
While large scale mergers often make dividend and earnings analysis more difficult, the AT&T-DirecTV and Kinder Morgan deals will likely support the same or even higher dividend payouts ahead.