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As a reaction to the sting of the stock market decline from October 2007 to March 2009, there has been a mad rush by many investors to seek safety by investing in high yield stocks. The problem with investing in high yield stocks is that high yield almost literally means higher risk. This concept is especially true when an investor cannot differentiate between high and low quality stocks in general. What few investors realize is that stocks that generate “low” dividend yields tend to make up for it with above average price appreciation.

Unfortunately, a person who is bound and determined to get the highest yield possible is more likely to select a stock that will not stand the test of time as oppose to selecting a company that, although sporting a high yield, has a reputation of good management and a long history of dividend increases like my favorite Dividend Achievers from Mergent’s. Even more striking is the fact that low yielding, high quality, Dividend Achievers run circles around their high quality, high yielding brethren.

A great summary on the misguided effort of buying high yield stocks is titled “Investing in High-Yield Stocks” by Dividends4Life (D4L) at SeekingAlpha.com. In the article, the author cites data that shows the immense trade-offs when trying to obtain the highest yields available without regard to quality. D4L later goes on to name some of the very best high quality, high yielding stocks that are part of the Dividend Achiever index of stocks.

In an effort to demonstrate the power and conviction of the idea that high quality, low yielding stocks make up for what they lack in yield, I have compiled a list of current and former Dividend Achievers with dividend yields below 3% that have appreciated in value by at least 60%. This list does not include financial (banks, brokerage, and insurance) companies since most, if not all, increased in proportion to their exaggerated declines. Also, this list of stocks excludes non-financial companies that have increased in value more than 30% to 59%. Having so many companies on the list would only overstate the obvious.

Symbol Name Price Yield % Up
XEC Cimarex Energy $64.42 0.50% 157.06%
HP Helmerich & Payne $42.76 0.50% 60.51%
GCI Gannett $18.28 0.90% 509.33%
HOG Harley-Davidson $35.22 1.10% 134.96%
NDSN Nordson Corp $75.58 1.10% 120.80%
ROST Ross Stores, Inc. $58.40 1.10% 68.11%
HRC Hill-Rom Holdings $31.55 1.30% 177.97%
SCL Stepan Co $74.79 1.30% 113.44%
TJX TJX Co, Inc. $47.69 1.30% 79.15%
TDS Tel and Data Systems $35.42 1.30% 60.93%
WWW Wolverine World Wide $31.50 1.40% 75.00%
FO Fortune Brands $53.73 1.40% 70.14%
FELE Franklin Electric $35.40 1.40% 64.65%
JWN Nordstrom, Inc. $45.34 1.50% 149.81%
JCI Johnson Controls $35.01 1.50% 100.98%
FAST Fastenal Co $55.71 1.50% 90.46%
AOS A.O. Smith Corp $52.87 1.50% 88.62%
PH Parker-Hannifin $70.44 1.50% 78.19%
TNC Tennant Co $34.86 1.60% 147.76%
CSL Carlisle Companies $40.75 1.60% 100.54%
MAS Masco Corp $18.10 1.70% 122.09%
SWWC Southwest Water $10.55 1.90% 144.21%
BGG Briggs & Stratton $22.57 2.00% 75.10%
SWK Stanley Black & Decker $63.00 2.10% 101.92%
BRC Brady Corp $33.29 2.10% 79.46%
TFX Teleflex Inc $64.46 2.10% 65.41%
PNR Pentair, Inc $37.85 2.10% 63.15%
AVY Avery Dennison Corp $38.57 2.10% 62.40%
HHS Harte-Hanks, Inc. $13.88 2.20% 112.88%
DOV Dover Corp $50.25 2.20% 70.05%
SJM J.M. Smucker Co $63.01 2.20% 67.71%
GD General Dynamics $78.21 2.20% 64.27%
UTX United Technologies $76.43 2.30% 65.22%
NC NACCO Industries $86.59 2.40% 219.64%
FSS Federal Signal Corp $10.01 2.40% 84.35%
ITW Illinois Tool Works Inc. $52.35 2.40% 66.30%
CAT Caterpillar, Inc. $67.51 2.50% 124.96%
MDP Meredith Corp $37.01 2.50% 93.16%
ACO Amcol Intl $30.60 2.50% 89.47%
NFG National Fuel Gas Co $53.10 2.50% 73.76%
MMM 3M Co $86.05 2.50% 64.82%
EMR Emerson Electric Co $52.59 2.60% 73.34%
PII Polaris Industries Inc. $63.99 2.70% 141.11%
HD Home Depot, Inc. $35.72 2.70% 60.40%
KWR Quaker Chemical $32.54 2.90% 211.98%
LYTS LSI Industries Inc. $6.89 2.90% 66.02%
VFC V.F. Corp Co. $86.84 2.90% 63.02%
Companies are ranked by dividend yield

The average performance of the above 47 low yielding stocks exceeded the 1-year gain (April 23, 2009 to April 23, 2010) in the Dow Industrials by 64%, the Nasdaq Composite by 53% and the S&P 500 Composite by 75%. Although all of the stocks on this list had much higher dividend yields one year ago, they certainly weren’t the “must have” high yield stocks that everyone was clamoring for.

It should be noted that there is a distinct difference between a high yield and a high paying out of company earnings to meet the quarterly dividend payments (also known as payout ratio.) A high dividend yield is derived from the amount of the dividend payment in relation to the current market price of the stock. If a stock is selling for $10 and earnings are $12 per share with the dividend payment at $2, then the dividend yield is 20% and the payout ratio is 16%. However, if the same company with the same dividend payment has earnings per share of $2.05, then the yield is still 20% but the payout ratio is 98%.

Although a 20% dividend yield is extremely high, it is unclear how sustainable the dividend is, especially with earnings at $12 per share. However, with a payout ratio of 98%, the likelihood of the dividend being cut is almost guaranteed. It is just a matter of time.

Investing notes:

  • Avoid stocks with high payout ratios
  • Don’t ignore low yielding, high quality stocks

Disclosure: No positions

Source: Low Dividend Yields Equaled Big Gains