Dividends are a classic symbol of financial stability. But in the short run, even companies with a long history of paying dividends can see their shares plunge during periods of panic selling. The current market sell-off has pushed dividend yields on a number of such stocks to tempting levels. While some may turn out to be value traps, others are starting to look like bargains.
In the wake of the recent sell-off, dividend yields on many of the largest companies in the US have risen to tempting levels. Among the constituents of the S&P 500 index, 43 companies are paying dividend yields of 4% or more, according to Reuters Knowledge. The list includes many of the usual high-yielding suspects such
as utilities and real estate investment trusts.
Trend-beater: Pfizer is among stocks that are paying high dividends.
But companies from a variety of industries have joined the high-yield ranks. Take Pfizer. At a recent $24 (Rs986), the drug maker is sporting a dividend yield of 4.9%. That’s better than the current yield on 10-year treasury bonds. It is also a full two percentage points above Pfizer’s average dividend yield over the past five years.
And Pfizer has hardly been stingy with dividends in the past. This year’s hike in the first quarter marks its 40th consecutive yearly increase. Over the previous five years, its dividend growth rate has been nearly 17% annually. Pfizer’s earnings growth rate may have slowed in recent years, but with ample cash flow and little debt, its dividend looks solid.
Ditto for Dow Chemical. Its 4.2% yield is about the same as you’d get on a three-year treasury. Dow just raised its dividend 12% in the past quarter and its payout ratio is a comfortable 43%.
The juiciest yields, however, involve venturing into the financial sector. Regional banks such as Washington Mutual and Huntington Bancshares are sporting yields of 6.9% and 6.4%, respectively. Both are about 300 basis points above their five-year averages. Bank of America’s 5.3% yield and Citigroup’s 4.7% are also well above their historical norms.
While the credit crunch makes the relative risk of dividend cuts more likely for financials, the prospect of Citi or Bank of America actually doing so seems remote. Citi has boosted its dividend by 26% annually over the past five years and Bank of America’s dividend growth rate has been 13%. To reverse course would require considerably more damage in the financial markets and real economy. Should such a scenario materialize, all bets are off. But barring a complete meltdown, high-yielding blue chips look like a safe place to hide.