When selecting dividend stocks, it’s critical to take a long, hard look at a company and consider how well the dividend is supported. A dividend cut is a dire scenario. There is no way to be absolutely certain a company won’t lower its payout, but extra homework will reduce that risk.
Investors might take comfort by considering shares of companies that have raised their annual dividend payouts steadily. The S&P 500 Dividend Aristocrats Index
SPDAUDP, -0.11%
is made up of the 57 companies in the S&P 500 Index
SPX, -0.23%
that have increased their regular dividend payouts for at least 25 consecutive years. The S&P High-Yield Dividend Aristocrats Index is made up of the 112 stocks in the S&P 1500 Composite Index that have raised regular dividends for at least 20 straight years. All Dividend Aristocrats are also High-Yield Dividend Aristocrats. However, despite the index names, many of the stocks have low dividend yields. The point is that the steadiness of dividend increases alone can be a positive indicator for long-term outperformance.
We listed the highest-yielding Dividend Aristocrats on Jan. 8. On Jan. 24, S&P Dow Jones Indices added four S&P 500 companies — Chubb
CB, -0.01%
People’s United Financial
PBCT, -0.34%
Caterpillar
CAT, -0.04%
and United Technologies
UTX, -1.18%
— to the Dividend Aristocrats list. Of the four, People’s United has the highest dividend yield of 3.95%, followed by Caterpillar at 2.45%.
Read: 6 easy ways to reach for ‘safe’ dividend yield with energy stocks
Screening for higher yields
Following a strong response from readers over S&P 500 real estate investment trusts with yields above 4%, we decided to take a broader look at dividend stocks and screen them by analyst ratings and free cash flow coverage of dividends.
Starting with the S&P 1500 Composite Index, there are 164 stocks with dividend yields of 4% or higher.
A very high dividend yield means investors believe a company can no longer maintain its dividend. Shares of a troubled company will typically decline well ahead of a dividend-cut announcement.
So we pared the list to 31 companies with majority “buy” or equivalent ratings from at least five sell-side analysts polled by FactSet.
Then we went further: One way of measuring a company’s ability to cover its dividend or raise the payout is to look at its free cash flow yield. A company’s free cash flow is its remaining cash flow after planned capital expenditures. If we look back 12 months and divide free cash flow per share by the current share price, we have the free cash flow yield. If this exceeds the current dividend yield, there appears to be “headroom” to increase the dividend. The more, the better.
Of course, a company may decide to do something else with the money. It is also important to keep in mind that looking back at a year’s cash flow doesn’t help you to understand if there may be a problem in the future. This is why you need to do your own research and decide for yourself if a company’s business strategy appears viable for the next decade.
For real estate investment trusts, we used funds from operations (FFO) instead of free cash flow, to make the “headroom” comparison. FFO adds depreciation and amortization back to earnings, while subtracting gains on the sale of property. It is a non-GAAP measure that is typically used by analysts for the REIT industry.
Here are the 20 S&P 1500 stocks with the highest dividend yields that also have majority “buy” or equivalent ratings from analysts and “headroom” based on free cash flow (or FFO) yields:
| Company | Ticker | Type | Dividend yield | Free cash flow yield | ‘Headroom‘ | Share ‘buy’ ratings |
| Whitestone REIT |
WSR, -1.59% |
Real Estate Investment Trusts | 7.86% | 8.20% | 0.34% | 67% |
| Brixmor Property Group Inc. |
BRX, -0.34% |
Real Estate Investment Trusts | 6.37% | 10.47% | 4.10% | 53% |
| Altria Group Inc |
MO, +0.22% |
Tobacco | 6.34% | 7.47% | 1.14% | 53% |
| Superior Industries International Inc. |
SUP, +4.71% |
Auto Parts: OEM | 6.32% | 29.06% | 22.75% | 60% |
| Summit Hotel Properties Inc. |
INN, +0.17% |
Real Estate Investment Trusts | 6.20% | 11.53% | 5.34% | 83% |
| Easterly Government Properties Inc. |
DEA, -0.39% |
Real Estate Investment Trusts | 5.78% | 6.62% | 0.83% | 83% |
| PacWest Bancorp |
PACW, -0.80% |
Regional Banks | 5.78% | 10.00% | 4.22% | 67% |
| Nielsen Holdings PLC |
NLSN, +0.35% |
Advertising/ Marketing Services | 5.42% | 9.64% | 4.22% | 61% |
| Philip Morris International Inc. |
PM, +0.52% |
Tobacco | 5.36% | 6.08% | 0.72% | 55% |
| Weingarten Realty Investors |
WRI, -2.23% |
Real Estate Investment Trusts | 5.35% | 7.68% | 2.34% | 55% |
| Armada Hoffler Properties Inc. |
AHH, -1.35% |
Real Estate Investment Trusts | 5.14% | 6.62% | 1.48% | 71% |
| Navient Corp. |
NAVI, -5.29% |
Finance/ Rental/ Leasing | 5.06% | 26.66% | 21.60% | 55% |
| Pebblebrook Hotel Trust |
PEB, +0.81% |
Real Estate Investment Trusts | 4.54% | 8.09% | 3.55% | 64% |
| Simon Property Group Inc. |
SPG, +0.69% |
Real Estate Investment Trusts | 4.46% | 6.77% | 2.30% | 64% |
| Schlumberger NV |
SLB, -2.16% |
Oilfield Services/ Equipment | 4.36% | 5.56% | 1.20% | 68% |
| Valero Energy Corporation |
VLO, -0.14% |
Oil Refining/ Marketing | 4.21% | 6.61% | 2.40% | 73% |
| Prudential Financial Inc. |
PRU, -0.34% |
Financial Conglomerates | 4.21% | 53.75% | 49.54% | 76% |
| International Paper Co. |
IP, -2.26% |
Containers/ Packaging | 4.19% | 8.41% | 4.22% | 53% |
| Kinder Morgan Inc. Class P |
KMI, +0.03% |
Oil & Gas Pipelines | 4.17% | 5.53% | 1.36% | 87% |
| Highwoods Properties Inc. |
HIW, +0.26% |
Real Estate Investment Trusts | 4.10% | 7.43% | 3.33% | 58% |
| Free cash flow yield and FFO data is for most recent available four reported quarters as of Feb. 20. Source: FactSet | ||||||
There are companies listed here that have cut dividends before. For example, Kinder Morgan
KMI, +0.03%
lowered its payout by 75% in December 2015, being driven to do so by the sharp decline in oil prices, but also saying at that time that the freed-up cash would enable it to continue growing its pipeline business.
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Source : MTV
