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In their research paper, “High Yield, Low Payout”, Credit Suisse analysts Pankaj N. Patel, Souheang Yao and Heath Barefoot found that the combination of a high dividend yield and a low payout ratio performed better than high yield alone.

To be able to follow a strategy such as the one in the paper, I created a simple indicator that combines both the dividend yield and the payout ratio. It does this by “adjusting” the dividend for the payout ratio. The formula is as follows.

SDividend Yield = (Dividend*(1-Payout Ratio))/Price
Where
Payout Ratio = Dividend/Earnings

The SDividend yield can be used to compare the dividend yield and payout ratio of stocks at the same time. This is useful for sorting stocks by yield while ensuring that the yield is sustainable.

SDividend yields and normal dividend yields cannot be compared to each other. The median SDividend yield for dividend paying stocks is slightly below one, whereas that of the regular dividend yield is closer to three. The SDividend yield for a stock can also be negative. This is caused by a payout ratio of over 100%. These companies are ones with which extra caution should be taken because there is a low chance of the company continuing to pay dividends.

Although I do not think this should be the only indicator used in dividend investing, I believe it can be a very useful addition to the toolbox of a dividend investor. It is also not a replacement for the dividend yield because the dividend yield IS the actual yield whereas the SDividend yield is not. Nevertheless, by using the SDividend yield instead of the regular dividend yield, we can gain a more accurate depiction of which stocks have high dividend yields combined with low payout ratios.

The 10 stocks in the S&P 500 with the highest SDividend yield are as follows. This is not a list of stocks to buy but rather a list of stocks to do further research on.

Name Ticker Price Stock Rank SDividend Yield (%)
Merck & Co. Inc. MRK 37.71 80.910 2.93
Eli Lilly & Co. LLY 36.15 81.523 2.705
Ameren Corporation AEE 26.45 51.465 2.61
Constellation Energy Group, Inc. CEG 36.05 88.550 2.57
Exelon Corp. EXC 44.28 65.428 2.31
Cincinnati Financial Corp. CINF 29.08 80.309 2.22
The Chubb Corporation CB 52.05 83.490 2.17
American Electric Power Co., Inc. AEP 34.49 55.907 2.15
FPL Group Inc. FPL-OLD 48.84 62.396 2.13
Lockheed Martin Corporation LMT 83.88 70.308 2.1

Disclosure: No positions

Source: A Simple Indicator for Dividend Investors