Why High Yield Dividend Stocks Have Become Scarce

The Donald Trump rally rolls on, pushing the Dow Jones Industrial Average toward 20,000 points. One casualty of this six-week rally, however, has been high yield dividend stocks because when share prices rise, yields fall. Combine that with higher Treasury yields on the heels of last week’s Fed rate hike, and suddenly just over one-fifth of the stocks in the S&P 500 pays a higher dividend yield than the 10-year U.S. Treasury note.

A few months ago, there were more than 200 such large-cap companies. Since then, the number of high yield dividend stocks has been sliced in half, and the average yield of the S&P 500 has tumbled below 2% (though just to 1.99%) for the first time in 18 months. Meanwhile, 10-year Treasury yields are up to 2.59%, its highest point since September 2014. This is the biggest disparity between Treasury yields and dividend yields since then.

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The Place to Find High Yield Dividend Stocks

With high yields increasingly scarce, it puts a premium on what relatively few high yield stocks remain. And I know just the place to find them—Cabot Dividend Investor. The portfolio of our premium dividend-paying advisory, run by income investing expert Chloe Lutts Jensen, features 10 stocks that currently yield more than the U.S. Treasury. In fact, the average yield of the 16 stocks and four bonds in Chloe’s portfolio is 3.2%, with a yield on cost of 3.6% and an average total return of 16%. At present, Cabot Dividend Investor has just one losing stock.

In other words, Chloe has dug up stocks that have maintained high dividend yields despite significant share price appreciation. Three stocks in her portfolio have a total return of more than 40% with an average yield of 2.7%. It’s proof that high yield dividend stocks aren’t solely stocks that haven’t participated in this incredible post-election rally.

To learn more about Chloe’s Cabot Dividend Investor advisory, click here.

Now, if you’d prefer to find high yield dividend stocks on your own, Dividend Aristocrats are likely the best place to start. They’re stocks that have grown their dividends every year for at least 25 years, and thus typically maintain a competitive yield even amid strong share price appreciation. Their dividends often grow in lockstep with the stock—or sometimes faster.

Johnson & Johnson (JNJ) is one good example. It’s a stock that has upped its dividend payout each of the last 53 years. Most years, JNJ delivers solid (if unspectacular) price appreciation in addition to high yields. This year is no exception: JNJ stock is up 12.3% in 2016 and carries a yield of 2.8%—good for a 15.1% total return, outpacing the 12.8% total return in the S&P 500.

Wal-Mart (WMT) is another good high yield dividend stock. It’s up 16.2% year to date yet maintains a Treasury-beating yield of 2.8%. Oh, and the company has increased its dividend annually for more than four decades.

Higher Yields Will Return

Even with dividend yields at an 18-month low, it doesn’t mean you should ditch your dividend-paying stocks and buy bonds and U.S. Treasuries instead. There are still plenty of good high yield dividend stocks out there—one out of every five large caps is plenty to choose from. Soon enough, the Trump rally will fizzle and yields will start to escalate again. But that’s not something you should be rooting for.

Embrace the challenge of finding high yield dividend stocks in a low-yield environment. I’ve given you a couple of examples. But if you want more and simply don’t have the time to uncover them on your own, Cabot Dividend Investor has plenty of recommendations!

Timothy Lutts

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