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MarketWatch's van Doorn: Consider Dividend Stocks

MarketWatch's van Doorn: Consider Dividend Stocks
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By    |   Monday, 31 August 2015 06:00 AM

With the S&P 500 index plunging 11 percent from Aug. 17 to Aug. 25 and then rebounding 6 percent, how does an investor cope with the volatility?

"You might consider common stocks for dividend income," writes MarketWatch columnist Philip van Doorn. "But be careful: If a common stock has a very high dividend yield, it can be a sign that the company is in serious trouble."

One way to determine the safety of a company's dividend is to look at its free cash flow yield, he says. If that yield is higher than the dividend yield, the company might have room to increase its dividend.

Van Doorn put together a list of the 10 S&P 500 stocks (excluding oil shares and REITs) with dividend yields above 4 percent that have the most room to boost dividends further, based on their free cash flow over the past year.

Navient, the student loan company; Ford Motor; Viacom; and specialty chemicals company Lyondell Basell topped the list.

Navient has a dividend yield of 5 percent and returned a negative 23.1 percent over the last year. Ford has a dividend yield of 4.4 percent and returned a negative 18.6 percent over the last year.

Viacom has a dividend yield of 3.8 percent (obviously this no longer meets the 4 percent criteria) and returned a negative 47 percent over the last year. Lyondell Basell has a yield of 3.3 percent and returned a negative 22.4 percent

You might notice a disturbing trend. All of those stocks suffered major losses in a period when the S&P 500 returned 1.4 percent. That might explain why their dividend is so high. If you're suffering major capital losses on your stock investments, a rising dividend represents little consolation.

For example, McDonald's stock has dropped 7 percent since April 2013, even though its dividend has risen 10 percent. If you owned 100 shares, you would have lost $730 on your principal, while seeing your annual dividend income increase $32. That's not a pretty equation.

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With the S&P 500 index plunging 11 percent from Aug. 17 to Aug. 25 and then rebounding 6 percent, how does an investor cope with the volatility? Consider common stocks for dividend income, writes MarketWatch columnist Philip van Doorn.
van Doorn, consider, dividend, stocks
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2015-00-31
Monday, 31 August 2015 06:00 AM
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