Dividend Stocks

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>>> Six High Dividend Stocks You Can Count On


Investors Business Daily

MATT KRANTZ

03/27/2020


https://www.investors.com/etfs-and-funds/personal-finance/high-dividend-stocks/


It's easy to chase high dividend stocks — and even easier to lose money on them if they fall. There's a better way to find high dividend yields you can count on to make you money — which includes stocks like REIT Coresite Realty (COR), banks like N B T Bancorp (NBTB) and retailer Home Depot (HD).

All things held equal, when a stock falls the dividend yield rises. In other words, if you own a company with a massive yield that's rising, you're likely losing money on the underlying stock. That's not a successful long-term strategy. It's actually a common way to lose money.

What's an investor looking for high dividend stocks to do then? Find stocks with market-beating yields and shares that at least keep pace with the market long term. That way you get a rich dividend that isn't eroded by a faltering stock price.

To help you find such opportunities, Investor's Business Daily pinpoints high dividend stocks that yield at least 40% more than the Standard & Poor's 500 (yielding roughly 2.1%). But, just as importantly, they have a stock price that at least keeps up with the market.

High Dividend Stocks: Math Distorts Reality

A rising dividend yield may simply be masking a money-losing stock. Math and the way dividend yields are calculated is why this happens. The formula for dividend yield is:

Dividend yield = Annual dividend/Stock share price

Why does this equation matter? A falling stock can make a dividend yield look great.

Let's say you buy a $30-a-share stock that pays $3 a year in dividends. You might be initially thrilled with your impressive 10% annual dividend yield ($3 dividend divided by $30 stock price). The stock's yield is 400% larger than the S&P 500's roughly 2.1% yield.

Now, the stock crashes to $15 a share and the company holds the dividend the same. Applying the same dividend yield formula, the stock's dividend yield doubles to 20%. Looks great. But wait a second, despite the higher yield, you're worse off because you lost $15 a share on the stock.

It will take five years of $3 dividend payments just to break even on your stock loss.

This is why chasing yield is often a bad idea when looking for high-dividend stocks. High yields are often a mathematical distortion of a declining stock.

Chasing Yield Can Cost You Money

Losing money on a dividend-paying stock is not just a theory. It's a common occurrence. In fact, 413 stocks in the S&P 500 paid a dividend going into 2019, says S&P Global Market Intelligence. Of those dividend-paying stocks, 38, or 9%, saw their shares fall enough during the year to wipe out the entire year's dividend yield, or worse. And that's in a good market. Nearly two-thirds of dividend stocks dropped by more than their yield in a less bullish 2018. And in 2020, nearly all S&P 500 stock are down more than their yield.

Take Kraft Heinz (KHC), one of Warren Buffett's high dividend stocks darlings, as an example. The stock yielded 5.8% going into 2019. Shares of the food company dropped 25% though, during the year. That left investors with a net loss of nearly 20%, even with the fat dividend.

Keep in mind, too, companies paying high dividends can cut them when the business wanes. General Electric (GE) cut its storied dividend in the fourth quarter of 2018 to just a penny a share, down from the 12 cents a share it paid previously.

High Dividend Stocks: IBD's Better Approach

So, if chasing yield doesn't work, what does? One IBD strategy looks for high-dividend stocks with signs of stability going for them.

Specifically, these stocks have:

High dividend yields of 3%-plus. That's more than 42% higher than the S&P's 2.1% yield.

Three- and five-year earnings growth of 10%-plus.

Earnings stability of 20 or better. Earnings stability is measured by looking at how much earnings per share swings from the five-year trend. A lower number indicates more stability.

No cuts to the dividend (which be harder to find after 2020).

IBD also only looks at stocks that have at least kept pace with the S&P 500 the past five years (a 28% gain through the end of the March 2020). That way, owning the high-dividend stocks at least didn't cost you in lost opportunity.

Finally, stocks also must have a Relative Strength Rating of 70 or higher out of a possible 99. This means the stock outperforms 70% of all stocks in IBD's database.

You might think no stocks can clear all these hurdles. Actually, six did.

High Dividend Yield Winner: Coresite

When you've narrowed down the list of high-dividend stocks this much, it's OK to look for the top dividend yields. That title goes to Coresite. Based in Denver, Coresite provides data center and computing facilities to more than 1,300 companies. The stock yields 4.4%, well above the market.

Real estate investment trusts, like Coresite tend to be high payers because tax rules require them to return 90% of their taxable income to shareholders annually.

Given that REITs must pay out nearly all earnings as dividends, it's not surprising to see one on the list of high dividend stocks.

Shares of Coresite are up 129% over the past five years. Earnings grew at an 11% annualized clip the past three years and are stable. On top of this, the company boosted its dividend by more than 25%.

Now, that's a reliable dividend.

Dividend Darling: Home Depot

Atlanta-based Home Depot runs near ubiquitous home-improvement and construction supply stores. The fact building supplies are used in remodels, not just new construction, offers some diversification to protect Home Depot somewhat in a slowdown.

The number that matters most to investors, though, is 3.1%. That's the dividend yield, which is backed up with 20% average annual, highly stable, earnings growth the past three years. The dividend has also risen by a healthy 32% clip. And rather than wiping out dividends, shares are up roughly 140% more than the S&P 500 over the past five years.

Banks Flex Their Dividend Power

Several banks, including N B T Bancorp, show why durable earnings coupled with dividend yields can be a powerful combination.

The Norwich, N.Y.-based bank's 3.3% dividend yield calls out to income-seeking investors. But our analysis shows there's more to it than just a market-beating payout. Double-digit earnings growth the past five years and 17% earnings growth the past three show the bank is tapping new routes of expansion. Most promising is the bank, following the financial crisis, is committed to dividend growth. N B T boosted its dividend 5%. All this, and an acceptable Relative Strength of 71.

The Full List Of IBD High Dividend Stocks You Can Count On


Symbol Company Indicated Yield % 3 Year EPS Growth Rate (%)
EPS Growth Rate % 5 Year EPS 5 YR Stability Factor Dividend Growth Relative Strength 5-Year Price Ch. %


(AYR) Aircastle Ltd* 4 16 10 18 10 97 42

(COR) Coresite Realty Corp 4.4 11 27 15 29 80 129

(HD) Home Depot Inc 3.1 20 19 3 32 79 68

(TXN) Texas Instruments 3.5 17 20 6 23 76 78

(NBTB) N B T Bancorp 3.3 17 11 6 5 71 29

(PCLB) Pinnacle Bancshares 3.1 14 10 3 9 71 37

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