Investors engaged in the seemingly never-ending search for yield were recently offered a half-dozen potential pots of gold at the end of the investment rainbow.
Barron’s recently warned that higher-yielding stocks can be a trap if you don't consider all the factors.
The biggest mistake dividend investors make is confusing “a high-yield stock for a growing-yield stock,” says David L. Bahnsen, chief investment officer of the Bahnsen Group, a wealth-advisory firm that oversees about $1.6 billion.
“We do not want what we call accidental high-yielders that back into a high dividend because their stock price has dropped.”
Dividend-paying stocks the firm holds include Merck (ticker: MRK), Boeing (BA), and McDonald’s (MCD).
For some other ideas, Barron’s took a look a basket of 50 dividend growth stocks that Goldman Sachs tracks under the ticker GSTHDIVG. Investors cannot invest directly in the basket, which was created in late 2006.
Company/Ticker Dividend Yield
- Huntington Bancshares (HBAN) 4.3%
- KeyCorp (KEY) 4.2
- Valero Energy (VLO) 4.1
- Kohl's (KSS) 3.8
- PepsiCo (PEP) 3.0
- Medtronic /(MDT) 2.3
At 4.3%, the highest-yielder on the list is Huntington Bancshares (HBAN), a regional bank based in Columbus, Ohio. The stock is very cheap, trading at a little under 10 times its 2019 profit estimate of $1.34 a share, Barron's said, noting that is below its five-year average forward P/E ratio of 13.2 times, according to FactSet.
KeyCorp (KEY), a larger regional bank based in Cleveland yields 4.2%. It is expected to earn $1.84 per share this year, and its forward P/E ratio was recently below nine, Barron's said.
Valero Energy (VLO), a large refiner, was recently yielding 4.1%.
Half of the stocks on the list— PepsiCo (PEP), medical-device maker Medtronic (MDT), and retailer Kohl’s (KSS)—have made strong gains over the past year. "Their yields are lower than those of the other three stocks. Nonetheless, faster-than-average dividend growth should help their performance," Barron's said.
To be sure, Newsmax Finance Insider Robert Ross also recently instructed readers how to find safe high-yield dividend stocks.
"When rates rise, stocks with high dividends beat the S&P 500 seven out of 10 times. But you don’t want to buy just any stock with a big dividend. Many struggling companies pay fat dividends as a way to lure investors," Ross wrote.
"Worse, some companies go as far as borrowing money to pay their dividend. That’s a recipe for disaster," Ross wrote.
"Here’s the catch. You must own the right kind of dividend-paying stocks. Be especially careful with stocks paying big dividends."