Tuesday, August 12, 2008

Despite high-profile cuts, dividend investors finding high yields

David Englander of MarketWatch has a post saying that even thought there have been some dividend cuts there are some good opportunities to find high yielding dividend stocks. Despite cuts, good opportunities for high yields can be found

According to Standard & Poor's the second quarter was the worst for dividend investors in the last 18: more $14 billion of dividends have evaporated this year as 20 financial firms in the S&P 500 Index have slashed their payouts.

Many of these companies boasted high dividend yields, in some cases well over 7%. Josh Peters, editor of the Morningstar Dividend Investor, notes that when the dividend yield tips above 7% investors need to be cautious because the risk of cuts grows.

But does this mean all investors in stocks with high yield dividends should run for the gates? Not necessarily. Companies don't cut the dividend lightly.

"The dividend is the last shoe to drop," says Howard Silverblatt, a senior index analyst at Standard and Poor's. "No one wants to cut their dividend because it is an open advertisement that you are having a cash-flow problem."

Another reason that companies are hesitant to cut their dividend: They don't want to risk alienating their long-term shareholders. Many long-term investors hold the stocks of companies precisely for their dividend. A cut in the dividend could lead to a mass exodus of these investors from the stock.

"Many companies are extremely proud of their dividend record. They do no want to destroy their shareholder's good will. The stockholders that hold for the dividend are exactly the kind of shareholders you want," Peters said.

Cash-strapped companies generally look for other ways to raise capital and cut dividends only as a last resort. In July, SunTrust Banks (STI) , a large commercial bank struggling from credit problems, sold a large chunk of Coca-Cola stock and left its dividend untouched.

Sun Trust's stock yields a hefty 6.7% and there had been speculation that the company would need to cut to conserve cash. But rather than cutting the dividend, the company used the Coke sale to improve its capital base.

Bank of America (BAC) , another troubled financial institution, managed to keep its dividend intact despite poor quarterly performance. The past quarter, the bank's earnings fell 44% and it wrote down $709 million in bad loans. Yet CEO Kenneth Lewis affirmed the bank will continue to pay its dividend, currently yielding over 7.7%.

Troubled banks aren't the only ones boasting high yields. Some banks that have been weathering the financial crisis better than others are also paying up. Regional bank BB&T (BBT) has been affected by the crises less than its peers. To prove its stable position, management raised its dividend in June, albeit only 1 cent to 47 cents, bringing the yield to about 6%.

It is not alone. While there have been many cuts in financials this year, there have also been 27 increases through the middle of June. This means investors won't need to look hard for banks that have been performing well that also offer decent yields.

One such bank, US Bancorp (USB) , while not yielding as high as others still rewards its holders with over a 5.3% payout -- not bad at all, considering profits are expected to increase this year.

Nilus Mattive, editor of Dividend Superstars, notes that there are plenty of high-yielding stocks outside of banks.

"While financials traditionally pay out the most in dividends, there are many other niches of this market where attractive yields can be found," he says.

Among these groups, he cites selected business development companies. BDCs are closed-end funds that make long-term investments. These companies are structured to pay out the majority of their earnings as dividends. Due to regulations they are required to maintain far less leverage than most financials, making them less risky.

One BDC that Mattive likes is American Capital Corporation (ACAS) , which is yielding over 18%.

Mattive's strategy for picking dividend stocks is to look for the biggest, the best and the longest dividend histories.

A Dow component that fits this criteria is Pfizer (PFE) , the pharmaceutical giant. It has a long history of paying a dividend, and it is currently yielding a fat 6.4%. It is also a member of the S&P High Yield Dividend Aristocrats, a list that S&P publishes of the 50 highest yielding companies in the S&P 500 that have increased their dividends every year for the past 25 years.

Of the current market, Mattive says, "Investors are going to look back at some of these companies with high yields and think they should have scooped them up while they had the chance."
Disclosure: The Div Guy owns shares of BAC, USB, ACAS and PFE at the time of this post.

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