A Dow facility in Germany. The company was yielding 4.5% recently.
Courtesy of Dow
High dividend yields are great for equity income investors, but it is possible to get too much of a good thing. The very highest yielders can be value traps, and vulnerable to cuts in their payouts.
The S&P 500 High Dividend Index, screened via an approach espoused by Savita Subramanian, head of U.S. equity strategy at BofA Securities, offers a way to get high payouts with more modest risk. The index, composed of 80 high-yielding dividend stocks culled from the S&P 500, has easily outperformed the S&P 500 so far this year, with a total return of 23% through Monday, compared with 18% for the broader benchmark.
Subramanian suggested that instead of buying the more vulnerable stocks in the top quintile of the S&P 500 in terms of yield, investors should look at the second quintile. Barron’s applied the same approach to the S&P 500 High Dividend Index.
We divided the index into quintiles, each with 16 stocks. The first contained the highest yielders, so we looked at the six highest yielders in the second quintile, based on FactSet data. All six of these companies have avoided dividend suspensions due to the pandemic, though one had to cut its payout. All but one have put through dividend increases this year.
One is Simon Property Group (ticker: SPG), a real-estate investment trust that specializes in regional shopping malls. The stock yields an attractive 4.6%, having returned about 50% this year through Aug. 2, dividends included.
The company recently declared a quarterly dividend of $1.50 a share, up 10 cents, or 7%, from $1.40 in the second quarter.
During the pandemic last year, the company slashed its quarterly payout to $1.30 a share from $2.10. The increase declared in June marked the first boost since it was cut.
Dividend Safety
These companies, culled from the S&P 500 High Dividend Index, aren’t among the top yielders, potentially providing some measure of dowside protection for dividend safety.
| Company/Ticker | Dividend Yield | Recent Price | YTD Return | Market Value (bil) |
|---|---|---|---|---|
| Simon Property Group/SPG | 4.6% | $126.32 | 51.4% | $47.5 |
| People’s United Financial/PBCT | 4.6 | 15.63 | 25.1 | 6.7 |
| International Business Machines/IBM | 4.6 | 141.42 | 15.1 | 126.8 |
| LyondellBasell Industries/LYB | 4.6 | 98.90 | 10.0 | 33.1 |
| Prudential Financial/PRU | 4.5 | 100.20 | 31.6 | 39.5 |
| Dow/DOW | 4.5 | 61.22 | 12.7 | 45.7 |
Data as of Aug. 2
Source: FactSet
Also weighing in with yields of 4.6% were People’s United Financial (PBCT), a regional bank based in Bridgeport, Conn., with a footprint that stretches across southeastern New York state and parts of New England; International Business Machines (IBM), and the chemicals company LyondellBasell Industries (LYB).
Shares of International Business Machines (IBM) have done respectably this year, returning about 15%, versus 18% for the S&P 500. The company is a relatively new member of the S&P 500 Dividend Aristocrat Index, a grouping of businesses that have paid out a higher dividend for at least 25 straight years.
IBM in April declared a dividend increase of a penny, or less than 1%, to $1.64 a share.
LyondellBasell Industries recently declared a quarterly disbursement of $1.13 a share, a nearly 8% boost from $1.05.
Meanwhile, insurer and money manager Prudential Financial (PRU) was recently yielding 4.5%. The company in February declared a quarterly dividend of $1.15 a share, versus $1.10 previously, for a nearly 5% increase. In an interview with Barron’s earlier this year, CEO Charlie Lowrey described the company’s dividend as “something you don’t mess with.”
Chemical company Dow (DOW), which also was yielding 4.5% recently, has maintained its quarterly dividend at 70 cents a share. Its year-to-date total return was about 13% as of Monday.
