Finding The Better Dividend Stocks

The highest yielding segments of the stock market have rightfully been smacked around since interest rates started to rise off the mat in late May. Not only does a high dividend yield become less attractive when bond rates rise, but a lot of defensive high yielders have traded at a mismatch for the past few years: rising PE ratios despite slow earnings (and slow dividend) growth. Ignoring that mismatch is harder now, given there’s a more competitive alternative in higher bond yields and the simple fact that seems to keep getting lost: if the Fed is considering a taper, that suggests a sentiment shift away from defensive and into cyclical stocks.

Just look at the performance of two leading utility sector ETFs; since the end of May Vanguard Utilities ETF (VPU) and iShares Dow Jones US Utilities (IDU) have fallen twice as hard as the broad market, as seen in a stock chart. The dividend payout ratio for the S&P 500 was 36% at the end of the second quarter. Even with slowed-down earnings growth there’s still plenty of room for more dividend growth. The long-term average payout ratio for the S&P 500 is 52%. Moreover, last we checked, corporate America was still awash in record cash, suggesting there’s no reason to expect dividend growth to suddenly take a U-turn.

Source: YCharts

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