With the Federal Reserve determined to keep interest rates at near record lows, many investors are turning to dividend yielding investments to generate income and for good reason. In fact, nearly 14 percent of the companies that are in the S&P 500 are paying more in dividends than the average yield being offered in the bond markets. One reason for this is that companies went into cost-cutting measures during the Great Recession cutting headcount and minimizing inventories. As a result many companies are sitting on piles of cash and are issuing dividends to distribute the cash out.
Some notable mentions here include Altria Group Inc (MO) which has a yield of 6.48%, AT&T (T), which has a yield of 6.02%, Verizon Communications (VZ) which has a yield of 6.31%, Lorillard Inc. (LO) which has a yield of 5.53%, Qwest Communications (Q), Entergy Corporation (ETR) which has a yield of 4.17%, Waste Management Inc. (WM) which is boasting a yield of 3.69% and Chevron Corp. (CVX) which has a yield of 3.63%. These are all companies that appear to have relatively sound strategies and are likely to continue to issue healthy dividends.
In addition to providing an income stream, dividends are known to be used as a recession safety net and an inflation hedge in times of economic recovery. Although there are numerous benefits behind investing in dividend producing securities, it is equally important to remain diversified. This can be done through the following ETFs:
- First Trust Morningstar Div Leaders Idx (FDL), which has an overall yield of 4.38% and includes AT&T, Chevron and Verizon in its top holdings.
- WisdomTree Dividend ex-Financials (DTN), which has a yield of 4.01% and includes Qwest Communications and Altria Group in its top holdings.
- iShares Dow Jones Select Dividend Index (DVY), which has an overall yield of 3.79% and includes Lorillard Inc., Entergy Corporation and Chevron in its top holdings.
In addition to remaining diversified, it is important to be mindful of political uncertainties that could put a damper on the appeal of dividends. The Bush tax cuts, which called for dividends to be taxed at 15% are set to expire at the end of this year and could result in dividends being taxed at ordinary income rates, which could get pushed up to 39.6% for the wealthiest Americans.
Disclosure: No positions