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Where Should Investors Look for Dividend Income?
Since the stock market’s steep downturn in 2008, it has become harder for income-oriented investors to find stocks that pay good dividends. The recession of 2008-2009 hurt many companies. The crisis in the financial industry was especially acute. As of February 11, 2011, the median yield of dividend-paying stocks under Value Line coverage was just 1.8%.
Commercial banks were once reliable sources of dividends, but cut or eliminated their payouts in the aftermath of the credit crisis, knowing that they needed to maintain more capital. Once the federal government’s requirements are clarified in April, some banks intend to ask the federal government for permission to raise their dividends. Some of the banking behemoths, such as JPMorgan Chase (JPM – Free JPMorgan Stock Report) and Bank of America (BAC – Free Bank of America Stock Report), have expressed an interest in boosting their disbursements. Even if they are allowed to do so, however, the payouts of most banks aren’t likely to return to prerecession levels anytime soon, and it might well be a few years (at least) before banks regain their status as good sources of dividend income.
The thrift industry was also hurt by the credit crisis. Some thrifts had to cut their dividends, but others made it through relatively unscathed. New York Community Bancorp (NYB), for example, maintained its dividend during the financial crisis and offers a generous yield.
Utilities have long been known for paying attractive dividends, and the recession didn’t change this. As of February 11, 2011, the average yield of the 54 stocks we cover in the Electric Utility Industry was 4.4%, and the average yield of the 12 equities we cover in the Gas Utility Industry was 3.8%. (The average gas utility stock is safer than the average electric utility issue, hence the discrepancy.) Investors who are looking at utility stocks should note that there is typically a trade-off between dividend yield and dividend growth potential. That is, a stock with a high yield (even by utility standards), such as Empire District Electric (EDE) usually has poorer dividend growth prospects than a stock with a relatively low yield, such as Wisconsin Energy (WEC).
The Real Estate Investment Trust (REIT) industry is another good source of dividend income. REITs must distribute at least 90% of their taxable income (excluding capital gains) to their shareholders. However, REITs have become more conservative in the wake of the real estate downturn and aren’t raising their payouts as much as they once did.
Don’t overlook stocks of companies in other industries. Although many drug companies pay no dividends, Eli Lilly (LLY), Bristol-Myers Squibb (BMY), and GlaxoSmithKline (GSK), among others, have attractive yields. Some integrated oil issues, such as the American Depository Receipts of Total S.A. (TOT) and Royal Dutch Shell (RDSA) pay hefty dividends.
The tax bill that was signed into law in late 2010 was helpful for dividend investors. The maximum 15% tax rate on dividend income for individual investors, which had existed since 2003, would have expired at yearend without the new law. However, the expiration was merely advanced to the end of 2012. If the lower tax rate on dividends isn’t extended beyond 2012, then dividends will be treated as ordinary income for individual investors beginning in 2013.
Each week, The Value Line Investment Survey publishes a table showing the highest dividend yielding stocks, based on estimated year-ahead dividends per share. This is a good screen for income-oriented investors. Value Line publishes additional tables showing the highest yielding nonutility issues and the stocks with the highest projected 3- to 5-year dividend yield.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.