Searching For Dividends
A dividend fund is a type of index fund which follows a mix of stocks that are broadly exposed to American or international companies which have shown time and time again that they pay out high dividends. Many of these companies show unexciting but steady growth which permits them to return value to shareholders very directly. The consistent payout belies stock market volatility. In other words, even though you get a nice conssitent income stream (perhaps reinvested) through this fund, you risk losing value on the fluctuations of the stock prices themselves.
In bonds this is similar to interest rate risk where the value of the underlying security fluctuates despite the promise of the bond issuer to pay the holder at the predetermined rate. So what’s the summary on these instruments? Well you get the same risk as general stocks, which means that it’s a high volatility instrument in comparison to bonds and money markets, but the added bonus is that the companies are usually steady, large entities that entice shareholders with regular payouts.
High Yield Dividend Funds Of Big Brokerages = Big Companies
To give you an idea of what companies are found in such funds, let’s take a look at the example of a major fund brokerage’s (which remains nameless) high dividend mutual fund. It is a large cap type fund with low expense ratios and a mere $3,000 minimum investment. The top 10 holdings and their most recent quarterly payout (as of April 2012) are the following:
- Exxon Mobil Corp ($0.47 per share)
- Microsoft Corp ($0.20 per share)
- Chevron Corp ($0.81 per share)
- General Electric Co ($0.17 per share)
- Procter & Gamble Co ($0.52 per share)
- AT&T Inc ($0.44 per share)
- Johnson & Johnson ($0.57 per share)
- Pfizer Inc ($0.22 per share)
- Coca-Cola Co ($0.51 per share)
- Wal-Mart Stores Inc ($0.40 per share)
Note that these are very well-known companies which may not have the dizzying growth of Google, Amazon, and other more recent high flying internet businesses. New companies like to conserve cash and withhold from investors so they can make large acquisition decisions and spend money on expansion. But established companies have fewer avenues of growth, well-delineated patterns of spending, and consequently higher payouts to keep investors happy and the stock prices higher by paying them directly.
Finding Your Own High Dividend Stocks
If you’re not interested in investing in the index funds of one brokerage firm and want to discover your own set of high dividend stocks, take a look at these following resources which are entirely free. We left out several tools which require payment or sign-ups for convenience but there may be excellent gems.
- Dividend Stock Screener – is a tool from www.dividend.com that allows screening specifically by payout amount in the last year as well as by other characteristics like industry, market capiatlization, and share price.
- Yahoo Stock Screener – the old workhouse from Yahoo in fact has a dividend option for screening. It’s in the share data block, under the drop down menu labeled “Dividend yield”.
- Bing Stock Screener – a new tool from Bing that is Ajax-heavy so responsive to user input on-the-fly. Lots of adjustable slider bars, including a filter for yield.
Useful Resources For Investing In High Dividend Mutual Funds
- About.com – has a list of dividend-specific websites that are a good start for research. The free screeners have been filtered out for you in the above list.
- Bio Stocks Pro – gives their list of the top 10 high dividend mutual funds for the past decade which is a pretty useful, long-term view. Included are some foreign stocks and also American financial companies which pay out sky-high yields.
- The Double Dividend Stocks Blog – presents topics continuously of high paying stocks in different sectors. Most recently in April 2012 this blog commented two undervalued blue chip energy companies.
Calculating Dividend Yields
The yield is calculated as the dividend payout divided by the share price at that time. A simple example: a company is trading at $50 a share, and executes a payout of $0.25 for 4 quarters. This results in a 2% yield, given by $1 divided by $50. There are some caveats associated with this metric. Imagine the company is struggling hard to prevent investors from fleeing, the cash reserves are dwindling and revenue is falling. In an effort to boost stock prices they temporarily pay out $1 knowing full well that it’s not sustainable long term. Then the 2% yield does not seem like such a great idea. Consider another scenario, a company is struggling hard and its stock price correspondingly drops to $10, but they carry through and pay out the $1 dividend. The yield would then be a whopping 10%. Is this a good buy? Probably not if the company is slow imploding under debt and poor business conditions.
Capital Losses And Volatility Risk
Capital gains is money you make when you sell off the mutual funds at a higher price than when you bought it. It’s separate from the money you gain from dividends. If the price of the mutual funds is lower at the time you sell than when you bought, then you will incur capital losses. The same situation holds for bonds and interest rates: when interest rates rise then the price of the bond will fall because people are pressured to sell the bonds with the older rates in order to get ones with the current, higher rates. There is no way to protect completely against capital loss risk, but there are ways to look for dividend funds which are made up for low volatility stocks.