With the paltry yields available on Treasury, bank and money-market vehicles these days, more investors are turning to high-yield stocks. But there's a catch: Many companies hit hard by recession haven't been able to maintain or increase stock dividends as they did in more prosperous times, so finding high-yield stocks with growing dividends is like finding needles in haystacks.
The average yield of Standard & Poor's 500 stocks has slipped to 3.1 percent, historically quite low. Rewards are there, however, if you have time to do your homework or you rely on someone else to find the best choices.
"With a Treasury bill rate of not much over 5 percent, a high-dividend stock would now be anything offering a yield of 4 percent or better," says Robert Haber, portfolio manager for the Boston-based Fidelity Balanced Fund and the Plymouth Income & Growth Fund. "If you find a down-and-out stock paying that high a rate and likely to have price appreciation when the economy turns, it's much better than putting your money in the bank."
Dividends of stocks on the Standard & Poor's 500 have grown an average of only 1 percent this year. That compares with a hefty 9.5 percent rise last year, 13.6 percent in 1989 and 10.4 percent in 1988. There have been 120 dividend cuts so far in 1991, compared with 71 in 1990 and 52 in 1989, and only 642 dividend increases vs. 825 last year and 1,037 in 1989.
"Despite the trends, you should have no problem finding stocks with rising dividends if you focus on companies with strong operations and managements who believe in dividends," says Bruce Baughman, portfolio manager of the Franklin Rising Dividend Fund. "There's always a high proportion of companies in the financial services industry with rising dividends, since insurance companies like to boost dividends even when times are bad."
Big stars in the high-yield field are electric utilities, offering average yields of 6 percent to 7 percent, followed, in order, by gas utilities, telephone companies, banks that haven't cut dividends, and cyclical stocks that are currently low in price. Yield isn't everything, since it may represent a desperate move to attract investors.
"I'd advise investors to disregard the highest-yield stocks of 8 percent to 12 percent because they run a greater risk of dividend cuts," says Arnie Kaufman, editor of the Standard & Poor's Outlook. "Your best income investments are in the 5 percent to 7 percent range; the companies are in reasonably good financial condition and the stocks feature secure dividends on an upward path."
Kaufman's favorite high-yield stocks with modest dividend growth expectations include Ameritech (around 5.5 percent dividend yield), Atlanta Gas & Light (6 percent), Brooklyn Union Gas (6.3 percent), Consolidated Edison (7.5 percent) and Potomac Electric Power (6.9 percent).
In financial services, he likes Banc One Corp. (2.7 percent), NCNB Corp. (4.2 percent), and John H. Harland (3.8 percent). From cyclical industries, he prefers International Business Machines (4.7 percent) and Westinghouse Electric (6.3 percent).
"I don't think everyone should own high-yielding stocks," says Kaufman. "But they offer high yield plus preservation of capital."