All too often, yield-starved investors give in to the temptation of high yield dividend stocks. Dividend yields greater than 5% look like an easy way to grab more current income on the surface, but dividend income is just part of the total return equation.
If a stock with a 6% dividend yield sees its price cut in half, an investor living off dividends in retirement would have been better off purchasing a lower yielding stock with less business risk and volatility, occasionally selling shares to meet his or her cash flow needs.
Remember, the market is quite efficient most of the time, so think first before chasing a high yield dividend stock that appears to be too good to be true. It often is.
With that said, we dug through our database of thousands of dividend stocks to search for companies offering a dividend yield greater than 4% with low stock price volatility, above average dividend safety, and enough dividend growth to protect retirees’ purchasing power. These characteristics don’t guarantee that these stocks won’t decline in price, but it’s a good place to start the hunt for income ideas to research on a deeper level.
1. Verizon (VZ)
Verizon is the biggest wireless services provider in the United States and offers a 5% dividend yield that is well protected by the company’s steady free cash flow generation. Over the trailing 12 months, VZ’s dividend has consumed just 47% of the free cash flow generated by the business, providing plenty of cushion.
VZ’s business has also proven to be very durable over the years. Sales only fell by 1% during the company’s fiscal year 2010 and otherwise expanded each year surrounding the financial crisis. Free cash flow per share also grew during 2008, 2009, and 2010.
While investors shouldn’t expect significant capital appreciation from a mature stock such as VZ, its dividend is very safe and the stability of the company’s business model is reflected in the stock’s relatively low beta of 0.39.
VZ’s dividend growth has averaged 2%-to-3% over the past decade and will likely remain at that pace going forward. This moderate level of income growth won’t make anyone wealthy overnight but it better protects purchasing power compared to fixed interest payments received from bonds. VZ is in our Conservative Retirees dividend portfolio because of its defensive characteristics and solid current income generation.
2. Crown Castle International (CCI)
Crown Castle International owns a portfolio of shared wireless infrastructure such as towers that it leases out to leading wireless providers such as AT&T and Sprint. As demand for data grows, CCI should enjoy higher tower utilization rates and favorable rent increases.
While the company maintains a relatively high debt load, it has generated free cash flow each of the last 10 years and grown its annual free cash flow per share at a 13% annualized rate over the last five years.
The stock currently offers a 4.1% dividend yield and most recently raised its dividend by 8% last month. Like Verizon, CCI’s stock price volatility is also low with a beta of 0.39.
3. Consolidated Edison (ED)
Consolidated Edison is an electric and gas utility holding company with operations focused in New York, New Jersey, and Pennsylvania. The predictable cash flows received from regulated utility operations draw the attention of income investors, and ED is especially attractive because of the generally supportive regulatory environment in its core geographic regions and its strong credit rating.
ED has a dividend yield of 4.1% and has increased its dividend for more than 40 consecutive years, qualifying it as one of the 2015 dividend aristocrats. The company’s dividend growth has averaged 1%-to-2% per year over the past decade, helping offset inflation. ED’s earnings payout ratio over the trailing 12 months was also less than 60%, providing opportunity for continued dividend growth.
Retirees looking to preserve their capital and sleep well at night will also appreciate ED’s stock price beta of approximately 0, meaning it has been largely unaffected by broader moves in the market.
4. Darden Restaurants (DRI)
Darden Restaurants owns more than 1,500 restaurants across the United States and Canada, including Olive Garden, LongHorn Steakhouse, The Capital Grille, Seasons 52, and several other trademarks. Activist investors have spurred the company to engage in numerous sale and leaseback transactions and spin off select real estate and restaurant assets into an independent, publicly traded REIT. These actions are raising up to $1 billion in cash that DRI will use to reduce its debt.
While the restaurant industry is subject to fickle demand trends from one month to the next, DRI has generated free cash flow in each of the last 10 years and grown its dividend at a 17% annualized rate over the past five years. The stock currently yields 4.1% and has exhibited relatively low price volatility with a beta of 0.47.