Tags: Higher | Dividend | Yields

Plunge’s Silver Lining: Higher Dividend Yields

By Michael Kling   |   Thursday, 18 Aug 2011 01:37 PM

There's some good news about the stock market slide: yields on dividend-paying stocks are even better than before.

The average yield for a dividend-paying company in the S&P 500 is 2.66 percent, compared to a 10-year Treasury note yielding just over 2 percent late Wednesday, reports CNNMoney. Almost a third of the companies in the S&P 500 index have dividend yields higher than the 10-year Treasury.

Dividend yields can increase either because companies decide to increase their dividends or because their stock prices drop. Obviously, they've recently increased for the second reason.

Many financial advisors recommend holding dividend-paying stocks for income and diversification. They can help prop up your portfolio when stock markets fall but still produce income if stock values don't increase. They can also protect investors against more volatility.

"It's normal for a market to enter a correction, but companies don't change their dividends in response to that," Josh Peters of Morningstar told CNNMoney. "We've actually seen a tremendous number of dividend increases this year."

Companies should generally report strong earnings in the second quarter, so they probably won't reduce their dividends.

Dividend yields will also probably be better investments than bonds, experts told CNNMoney.

With the Federal Reserve holding short-term rates low into 2013, bond yields will probably stay low for the foreseeable future.

Peters recommends health care companies and utilities, which often produce some of the best yields. However, he warns that extremely high dividends, those over 8 percent, are not sustainable, according to CNNMoney. A yield over 10 percent could mean investors are selling and there's a problem with the company.

Dividend yields over 7 percent may be unsustainable, states Kapitall, an online investing platform, in an article posted on Seeking Alpha.

Payout ratios – the ratio of dividends to earnings which indicates how much earnings the company pays back to investors – over 35 percent may be also be unsustainable, according to Kapitall. Any drop in cash flow could prompt the company to slash its dividend.

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