It’s easy to chase high dividend stocks — and even easier to lose money on them if they fall. There’s a better way to find high dividend yields you can count on to make you money — which includes stocks like materials company Rio Tinto (RIO) and financials like Federal Agricultural Mortgage (AGM) plus M.D.C. Holdings (MDC).
All things held equal, when a stock falls the dividend yield rises. In other words, if you own a company with a massive yield that’s rising, you’re likely losing money on the underlying stock. That’s not a successful long-term strategy. It’s actually a common way to lose money.
What’s an investor looking for high dividend stocks to do then? Find stocks with market-beating yields and shares that at least keep pace with the market long term. That way you get a rich dividend that isn’t eroded by a faltering stock price.
To help you find such opportunities, Investor’s Business Daily pinpoints high dividend stocks that yield at least 3%, which is 100% more than the Standard & Poor’s 500 (yielding roughly 1.5%). But, just as importantly, they have a stock price that at least keeps up with the market.
High Dividend Stocks: Math Distorts Reality
A rising dividend yield may simply be masking a money-losing stock. Math and the way dividend yields are calculated is why this happens. The formula for dividend yield is:
Dividend yield = Annual dividend/Stock share price
Why does this equation matter? A falling stock can make a dividend yield look great.
Let’s say you buy a $30-a-share stock that pays $3 a year in dividends. You might be initially thrilled with your impressive 10% annual dividend yield ($3 dividend divided by $30 stock price). The stock’s yield is 500% larger than the S&P 500’s roughly 1.6% yield.
Now, the stock crashes to $15 a share and the company holds the dividend the same. Applying the same dividend yield formula, the stock’s dividend yield doubles to 20%. Looks great. But wait a second, despite the higher yield, you’re worse off because you lost $15 a share on the stock.
It will take five years of $3 dividend payments just to break even on your stock loss.
This is why chasing yield is often a bad idea when looking for high-dividend stocks. High yields are often a mathematical distortion of a declining stock.
Chasing Yield Can Cost You Money
Losing money on a dividend-paying stock is not just a theory. It’s a common occurrence. In fact, 405 stocks in the S&P 500 paid a dividend going into 2020, says S&P Global Market Intelligence. Of those dividend-paying stocks, 167, or 40%, saw their shares fall enough during the year to wipe out the entire year’s dividend yield, or worse. And that’s in a good market for the S&P 500. Nearly two-thirds of dividend stocks dropped by more than their yield in a less bullish 2018. And in 2019, 9% of S&P 500 stocks that paid a dividend coming into the year are down more than that yield.
Take Occidental Petroleum (OXY), up until recently one of Warren Buffett’s high dividend stock darlings, as an example. The stock yielded 7.7% going into 2020. Shares of the energy company dropped 50% though, during the year. Additionally, the company slashed its dividend. That left investors with a net loss of more than 50%, even with the remaining paltry 0.2% dividend.
Keep in mind, too, companies paying high dividends can cut them when the business wanes. Occidental did that in 2020. Ford (F) cut its storied dividend in the first quarter of 2020 to nothing, down from the 15 cents a share it paid previously. Ford’s dividend yield was 6.5% in early 2020.
High Dividend Stocks: IBD’s Better Approach
So, if chasing yield doesn’t work, what does? One IBD strategy looks for high-dividend stocks with signs of stability going for them. Specifically, these stocks have:
- High dividend yields of 3%-plus. That’s more than 100% higher than the S&P’s 1.3% yield.
- Three- and five-year earnings growth of 10%-plus.
- Earnings stability of 20 or better. Earnings stability is measured by looking at how much earnings per share swings from the five-year trend. A lower number indicates more stability.
- No cuts to the dividend (which will be harder to find after 2020).
IBD also only looks at stocks that have at least kept pace with the S&P 500 the past five years (a 107% gain through early March). That way, owning the high-dividend stocks at least didn’t cost you in lost opportunity.
Finally, stocks also must have an IBD Composite Rating of 65 or higher out of a possible 99. This means the stock and fundamentals outperform 65% of all stocks in IBD’s database.
You might think no stocks can clear all these hurdles. Actually, five did.
High Dividend Yield Winner: Rio Tinto
When you’ve narrowed down the list of high-dividend stocks this much, it’s OK to look for the top dividend yields. That title goes to Rio Tinto. Based in London, Rio Tinto mines and processes materials ranging from aluminum to copper and diamonds. And it yields a lucrative 5.5%. Additionally, the company’s yield is up more than 30% over the past five years.
But it’s not just a high-yield wonder. The stock is up more than 57% in just the past 52 weeks. Commodity prices continue to jump as the economy slowly reopens. And the stock has outperformed the S&P 500 by 149% over the past five years.
And it’s a stable company. Earnings have grown nearly 30% over the past five years and by 15% in the past three. All this and a rock solid IBD Composite Rating of 94.
Solid Source Of Dividend Yield: Federal Agricultural Mortgage
Federal Agricultural Mortgage continues to be a rock-solid source of dividends you can count on. Based in Washington D.C., Federal Agricultural Mortgage operates a secondary market for a variety of loans. Those loans range from those to farms as well as USDA guarantees. The stock’s Class C shares yield 3.5%, well above the market.
Shares of Federal Agricultural Mortgage are up 190% over the past five years, or roughly 37% better than the S&P 500. Earnings grew at an 12% annualized clip the past three years and are stable. On top of this, the company boosted its dividend by more than 33% the past five years.
Now, that’s a reliable dividend.
Housing Flexes Its Dividend Power
Historically banks and homebuilders show why durable earnings coupled with dividend yields can be a powerful combination. Homebuilder M.D.C. Holdings is a case in point.
The Denver-based homebuilder’s 3.1% dividend yield calls out to income-seeking investors. But our analysis shows there’s more to it than just a market-beating payout. Nearly 31% earnings growth the past five years and 26% earnings growth the past three show the builder is tapping new routes of expansion. Most promising is the builder, is committed to dividend growth. MDC boosted its dividend 11%. All this, and an acceptable IBD Composite Rating of 78.
The Full List Of IBD High Dividend Stocks You Can Count On
| Symbol | Company | Indicated Yield % | 3 Year EPS Growth Rate (%) | EPS Growth Rate % 5 Year | EPS 5 YR Stability Factor | Dividend Growth (5 Year) | Composite Rating | 5-Year Price Ch. % Vs. S&P 500 |
|---|---|---|---|---|---|---|---|---|
| (RIO) | Rio Tinto | 5.5% | 15% | 29% | 17 | 32% | 94 | 149% |
| (CP) | Canadian Pacific Railway | 4.0% | 16% | 15% | 5 | 19% | 68 | 100% |
| (AGM) | Federal Agricultural Mortgage | 3.6% | 12% | 17% | 5 | 33% | 69 | 93% |
| (OPYGY) | P J S C Polyus | 5.0% | 30% | 25% | 9 | 26% | n/a | 69% |
| (MDC) | M.D.C. Holdings | 3.1% | 26% | 31% | 12 | 11% | 78 | 53% |
