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 materials company B H P Group (BHP) and financials like Federal Agricultural Mortgage (AGM) plus Timberland Bancorp (TSBK).
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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 3%, which is 100% more than the Standard & Poor’s 500 (yielding roughly 1.5%). 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 500% larger than the S&P 500’s roughly 1.6% 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, 43% of S&P 500 stocks that paid a dividend coming into the year are down more than that yield.
Take Occidental Petroleum (OXY), up until recently one of Warren Buffett’s high dividend stock darlings, as an example. The stock yielded 7.7% going into 2020. Shares of the energy company dropped 55% though, during the year. Additionally, the company slashed its dividend. That left investors with a net loss of nearly 50%, even with the remaining paltry 0.2% dividend.
Keep in mind, too, companies paying high dividends can cut them when the business wanes. Occidental did that this year. Ford (F) cut its storied dividend in the first quarter of 2020 to nothing, down from the 15 cents a share it paid previously. Ford’s dividend yield was 6.5% in early 2020.
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 100% higher than the S&P’s 1.5% 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 will 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 (an 86% gain through the middle of December 2020). That way, owning the high-dividend stocks at least didn’t cost you in lost opportunity.
Finally, stocks also must have an IBD Composite Rating of 65 or higher out of a possible 99. This means the stock and fundamentals outperform 65% of all stocks in IBD’s database.
You might think no stocks can clear all these hurdles. Actually, three did.
High Dividend Yield Winner: Federal Agricultural Mortgage
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 Federal Agricultural Mortgage. Based in Washington D.C., Federal Agricultural Mortgage operates a secondary market for a variety of loans. Those loans range from those to farms as well as USDA guarantees. The stock yields 4.4%, well above the market.
Shares of Federal Agricultural Mortgage are up 123% over the past five years, or roughly 40% better than the S&P 500. Earnings grew at an 16% annualized clip the past three years and are stable. On top of this, the company boosted its dividend by more than 39% the past five years.
Now, that’s a reliable dividend.
Dividend Darling: B H P
Australia.-based B H P mines a variety of materials used in many industries. It explores for petroleum, copper and iron ore. It also mines for silver, uranium and gold.
The number that matters most to investors, though, is 3.6%. That’s the dividend yield, which is backed up with 28% 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 110% more than the S&P 500 over the past five years.
Banks Flex Their Dividend Power
Historically banks, including Timberland Bancorp, show why durable earnings coupled with dividend yields can be a powerful combination.
The Hoquiam, Wash.-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. Nearly 25% earnings growth the past five years and 18% earnings growth the past three show the bank is tapping new routes of expansion. Most promising is the bank, is committed to dividend growth. Timberland boosted its dividend 26%. All this, and an acceptable IBD Composite Rating of 89.
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 (5 Year) | Composite Rating | 5-Year Price Ch. % Vs. S&P 500 |
|---|---|---|---|---|---|---|---|---|
| (BHP) | B H P Group | 3.6% | 28% | 38% | 19 | 32% | 94 | 110% |
| (MDC) | M D C Holdings | 3.1% | 18% | 31% | 12 | 7% | 96 | 51% |
| (AGM) | Federal Agricultural Mortgage | 4.4% | 16% | 19% | 5 | 39% | 66 | 41% |
| (HPQ) | H P | 3.2% | 12% | 12% | 4 | 14% | 70 | 21% |
| (SMMF) | Summit Financial | 3.0% | 10% | 12% | 7 | 19% | 88 | 18% |
| (TSBK) | Timberland Bancorp | 3.3% | 18% | 22% | 4 | 26% | 89 | 18% |
Source: Investor’s Business Daily through Dec. 18, 2020
Follow Matt Krantz on Twitter @mattkrantz
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