4.68% yields on Treasury bonds are achievable with low risk. Therefore, the yield needed to be exceptional in order to even evaluate S&P 500 firms that pay dividends.
Research by Investor’s Business Daily of information from S&P Global Market Intelligence and MarketSmith reveals that only 11 S&P 500 equities pay CD-busting yields of 7% or higher, including utilities PG&E (PCG), Pioneer Natural Resource (PXD), and V.F. (VFC). That would probably be the lowest dividend return that investors would agree to in exchange for taking on stock risk.
The difficulty for investors seeking income is also that. The S&P 500 has a difficult time offering compelling dividend yields. Also difficult to surpass is the 4.7% risk-free rate on 10-year Treasury bonds (or even 5% on CDs). It might be challenging to find dividend stocks worth your time.
“Our advice to investors is to avoid falling victim to the stock market’s popularity contest and feeling pressured to buy particular stocks just because everyone else is doing it. Fundamentals, cash flows, and dividends should all be taken into consideration, according to The Bahnsen Group’s chief investment officer, David Bahnsen.
S&P 500 Dividend Yields Are Declining
Why are stable dividend yields in the S&P 500 so uncommon? It’s interesting to note that the strong performance of the S&P 500 this year is pushing down dividend yields. It is a fact of mathematics.
The current yield of the S&P 500 is a pitiful 1.4%. This is a decrease from the 1.6% yield it had earlier in the year. The 12% increase in the index this year lowers the yield. That’s because the method used to compute yields causes yields to decrease as prices increase. As a result, yields increase as stock prices decline. And as you might anticipate, the S&P 500 is underperforming all 11 of the equities with yields of 7% or higher. All of them are actually down this year, some significantly.
In addition, according to Howard Silverblatt of S&P Dow Jones Indices, S&P 500 corporations reduced their real dividend payments by 2.3% in the second quarter compared to the first. “Uncertainty over a potential recession, earnings, and both government and corporate debt costs increased to limit the Q2 2023 increases,” the official stated. Updates for the third quarter will be available after earnings season.
Furthermore, several industries that favor dividend growth are currently cooling off. Financials are hesitant to increase dividends due to increased regulation. Numerous utility stock prices are also falling.
A 34% yield on the S&P 500 dividend?
Of course, but at great risk.
PG&E was the biggest win for dividend hunters this year. The electric and natural gas utility operator in Oakland has a phenomenal 34.1% yield. But one shouldn’t bank on it.
In the fourth quarter of 2017, the ailing corporation formally ceased paying a dividend on its ordinary stock. However, “the Board of Directors of the Utility declared a common stock distribution of $425 million on February 16, 2023, which was paid to PG&E Corporation on February 28, 2023. According to the company’s 10-Q for the second quarter, “the Board of Directors of the Utility authorized a common stock dividend of $450 million on May 18, 2023, which was paid to PG&E Corporation on June 21, 2023. The business is clear that it will not necessarily reinstate the common stock dividend at the current rate, though.
Amazingly, as of July, the price of this S&P 500 stock had increased by a further 7.2% for the year. However, the stock collapsed in September. It has currently decreased by 6.4% compared to last year. PG&E’s stock price undoubtedly underperforms the S&P 500, but with such a high dividend, investors are still getting paid. The company’s consistent profit outlook can provide investors with at least some solace. According to analysts, PG&E will earn $1.21 per share this year on an adjusted basis, an increase of 10% from 2022. Analysts also predict that the corporation will increase its profits every year through at least 2027.
The stock price isn’t predicted to fall by analysts either. In a year, it is anticipated that the stock will trade for 19.12 per share. That is around 8% more than it is at the moment.
Other S&P 500 High Dividend Plays
The S&P 500 stock with the highest yield in the energy category continues to be Pioneer Natural. The yield for the oil exploration company in Irving, Texas, is 12.0%. That yield has also not coincided with a significant decline in the stock price. Only 1.7% of the company’s shares have decreased in value this year to 224.46 each. Analysts believe the stock can continue to rise once more. In a year, they forecast that the stock would be worth $261.12 per share. Profit should decrease by 33% this year but increase by 15% in 2024.
Another high-yielding stock that benefits from the stock price decline is clothing manufacturer V.F. The business generates a remarkable 10.2% yield. But the main reason for that is that its shares decreased by over 40% this year to 16.59. According to analysts, the stock is still 30% cheaper when compared to where it should be in a year. But in fiscal 2024, profit is projected to decline by almost 4%.
Many investors might opt to forgo the dividend controversy and continue holding the 4.68% 10-year Treasury instead. However, the S&P 500 offers possibilities if dividend stocks are really your thing.