Getting income from your investment portfolio is hard these days, and the immediate reaction to the tragedy in Japan has been for yields of T-notes to fall back down again. The solution could be in a portfolio of large, well established firms that pay high dividends.
Ideally, you would want dividend companies that not only continue to provide regular dividend checks, but ones that increase them over time. The best safety measure for a dividend is a reasonable payout ratio. Very few companies are able to pay out everything they earn and still grow, and if the payout ratio gets up into the 70’s or 80’s the dividend tends to be vulnerable.
One can never be sure if a dividend will grow in the future, but firms that have a history of increasing their dividends each year are more likely to continue doing so than non-dividend paying firms are likely to initiate one. Firms that have cut their dividends in the recent past are not the ones you want to look for if you are concerned about the current dividend.
Below is a simple screen of potential income ideas. All the firms are members of the S&P 500 and have a current dividend yield (based on last nights close) of more than the current 10-year T-note of 3.29%. I also required that the current dividend be higher than it was five years ago, and the payout ration was below 60%.
In other words, these are large, well-established firms where the dividend is more likely to go up than down over the next few years, and which currently pay you more than the 10-year T-note does. I also eliminated all firms with Zacks #4 Ranks (Sell) and Zacks #5 Ranks (Strong Sell).
While dividend investing is for long-term investors, not frequent traders, there is no sense buying a firm for a 4% yearly yield, only to see it go down by 8% over the first week you own it. There is only one firm — Genuine Parts (GPC) — with a Zacks #2 Rank, and no number ones on the list, so this is not about quick trades, but about buying a stream of cash flows that will increase over time, and which pays you nicely while you wait. Think of investing in these sorts of firms as a “get rich slowly” scheme.