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As much as income investors prize high-yield dividend stocks, bear markets like the one we're going through now can throw a wrench into an otherwise prudent strategy.
The coronavirus bear market in particular has been tough on dividend stocks. Many companies have suffered sudden, sharp drops in revenue, and profits that have affected their ability to pay shareholders their dividends.
Companies in industries such as travel, entertainment, restaurants, REITs (real estate investment trusts), and energy have been hit especially hard.
According to CNBC, more than 200 stocks have reduced or suspended their dividends so far this year. With the pace of an economic recovery uncertain at best, more dividend stocks are likely to follow suit.
And that includes a lot of prominent names. We're talking about household names like General Motors Co. (NYSE: GM), Macy's Inc. (NYSE: M), and The Boeing Co. (NYSE: BA). Even a Wall Street darling like Walt Disney Co. (NYSE: DIS) had to trim its dividend following a 93% drop in earnings in its fiscal second quarter.
Collectively, investors stand to lose as much as $490 billion in dividend payments for all of the 2020 calendar year, according to a forecast from the Janus Henderson Global Dividend Index.
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While grim news for fans of high-yield dividend stocks, it's possible to avoid much of the carnage by putting your money into the companies least likely to cut their payouts. And with share prices down, yields have been pushed higher - making this an excellent time to grab such stocks.
To find the best choices, we used several criteria.
First, we screened for stocks with dividend yields of 5% or higher. Then we looked for companies with a payout ratio below 80% to ensure the dividend is affordable.
Finally, we ran our choices though a five-tier rating system devised by investing firm Reality Shares called DIVCON. The system rates the health of a company's dividend.
We looked for stocks ranked in the top two tiers. Both Tier 4 and Tier 5 stocks, according to Reality Shares, are likely to increase their dividend over the next 12 months (although a Tier 5 stock is more likely to do so).
Here's what we came up with...
The Best 5 High-Yield Dividend Stocks
AbbVie Inc. (NYSE: ABBV)
Dividend yield: 5.31%
Payout ratio: 79%
This Big Pharma company was spun off from Abbott Laboratories (NYSE: ABT) in 2013. Although in 2023 it will lose U.S. patent protection on big moneymaker Humira - the world's best-selling drug - the company has been making moves to prepare for that day. It has several immunology and cancer drugs, namely Skyrizi and Imbruvica, that are evolving into major moneymakers. AbbVie also completed its $63 billion acquisition of Allergan this month. Allergan adds 120 new products, headlined by the blockbuster Botox, as well as 60 more in the pipeline. With steady, solid growth expected for years to come, ABBV is a textbook income stock.
Franklin Resources Inc. (NYSE: BEN)
Dividend yield: 5.99%
Payout ratio: 55%
You may know this company better as investment management firm Franklin Templeton. It's a Dividend Aristocrat, having raised its dividend - which is paid monthly - 38 years in a row. In recent years, the company has had so-so returns, but last year it made a bold move to turn itself around: It bought Legg Mason for $4.5 billion. The deal made Franklin Templeton the sixth largest asset manager in the world (ranked by assets under management). It has a solid balance sheet and stands to benefit from a renewed interest in value investing. And for income investors, BEN also offers the potential for an occasional bonanza - a special dividend. It has distributed three over the past eight years. The last one, in 2018, increased the total annual dividend payout fourfold.
And we like our last three high-yield dividend stocks even more than these two...
People's United Financial Inc. (NYSE: PBCT)[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
Dividend yield: 6.60%
Payout ratio: 55%
People's United Financial is a holding company for People's United Bank, headquartered in Bridgeport, Conn. It operates more than 400 locations, mostly in New England states. This quiet regional bank is conservatively run and so far has weathered the coronavirus pandemic well. It reported a 22% year-over-year increase in its first-quarter earnings while increasing the amount of cash set aside for future losses by a factor of six. During the 2008 financial crisis, PBCT not only kept paying its dividend - it raised it. In fact, this bank is also a Dividend Aristocrat, having raised its payout 26 years running. The stock is down 35% on the year, so there's also a strong chance of making gains when the markets fully recover.
International Business Machines Corp. (NYSE: IBM)
Dividend yield: 5.63%
Payout ratio: 63%
The original Big Tech stock has spent most of the past decade in the investing doghouse as its legacy business eroded. But times have changed for Big Blue. In the last quarter of 2019, it broke its five-year streak of year-over-year revenue declines. The long transition toward a business focused on artificial intelligence and cloud services is finally starting to pay off. And the strategy is maturing at the perfect time - when both of those markets are poised to take off. That will not only keep IBM's dividend safe, but will also ensure the company can continue its annual dividend hikes. And the relatively low price/earning ratio of 11.27 means the stock price should rise as well.
U.S. Bancorp (NYSE: USB)
Dividend yield: 5.39%
Payout ratio: 42%
U.S. Bank is the fifth largest bank in the country; it has a market cap of $46 billion and assets of nearly $500 billion. It also carries the stamp of approval from investing legend Warren Buffett, who owns more than 10% of the shares. Like People's United Bank, U.S. Bank is conservatively run and has a history of delivering good returns. Its return on equity has been in the double digits for the past 10 years. In the first quarter, U.S. Bank set aside less money for future losses than most other banks - but that's because it already had a better-than-average ratio of reserves to loans. With less need to set aside cash for its reserve, U.S. Bank will have an easier time maintaining its dividend. Down 48% on the year, USB also has plenty of potential upside.
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.