Investors looking for immediate gratification in the form of cash dividends may want to consider blue-chip stocks like Verizon, Ford Motor, and United Parcel Service, all of which have fat yields compared to the average U.S. stock. Yield, which is calculated by dividing cash dividends paid over the past four quarters by the share price, is a key factor for many investors. However, the importance of dividends in stock valuation is becoming less relevant as dividends are becoming less common.
Of the nearly 2,000 U.S. companies in the YCharts database with market values of at least $1 billion, 43% pay no dividends. Companies like Goodyear Tire, Tesla, and O’Reilly Automotive have various reasons for not paying dividends, such as financial weakness, reinvesting profits into the business, or distributing profits through buying back shares. While dividends are appreciated by investors looking to live off their portfolios, there are downsides to generous payouts, such as limiting future dividend increases and the sustainability of high dividends.
High dividends may also indicate that a company is in a declining industry, such as tobacco or fossil fuels. For example, Altria Group, the maker of Marlboros, is facing declining cigarette unit volumes. Similarly, companies in the oil industry have high dividend yields and low P/E multiples, which may be a warning sign for investors. Some companies pay dividends through traditional quarterly checks, while others opt for the more tax-efficient route of share buybacks.
Investors should be cautious when considering high dividend-yielding stocks, as a high yield may come at the expense of growth potential. Companies that disburse large quarterly checks are unlikely to experience rapid growth in earnings per share, limiting future dividend increases. Additionally, it is important to assess the sustainability of high dividends and the overall health of the company. For example, General Motors went bankrupt after paying high dividends for years, leaving shareholders with nothing.
Overall, while high dividend yields may be enticing for investors seeking immediate returns, it is crucial to consider the long-term implications and potential risks associated with investing in high dividend-yielding stocks. As the landscape of the capital market continues to evolve, investors may need to adjust their strategies and prioritize factors beyond just dividend yields when making investment decisions.
