In Search Of High-Yield Dividend Stocks, Part 2

by: Bennington Investment Ideas

With historically low interest rates, investors have shown increased interest in dividend stocks. While some investors have been consistent disciples of a value approach to dividends when considering their growth prospects, others appear to be chasing yield. This follow-up article (see part 1 here) will present some distributions for dividend stocks and provide greater insight around where some opportunities might lie. It should be noted that I will not comment on fundamental value of individual stocks, but rather provide some starting lists and considerations. All dividend yield data is from

Dividends are Highly Correlated to Market Capitalization

This seems almost like a truism. Dividends are often associated with larger more mature companies. Fast growing start-ups tend to retain as much cash as possible to fund their expansion. Clearly there are exceptions, including Google, Inc. (NASDAQ:GOOG) and Facebook Inc. (NASDAQ:FB); however, even companies like Apple (NASDAQ:AAPL) and Cisco Systems (NASDAQ:CSCO) have now started paying dividends. The following table shows the distribution of companies in set market capitalization bands with the percent that pay dividends.

Dividend Paying Stocks by Market Capitalization
Market Cap Range Number of Stocks Number of Dividend Stocks Dividend Stocks as Percent of Total Stocks
> $20 Billion 424 378 89%
$1 - $20 Billion 2,125 1,331 63%
$500 MM - $1 Billion 656 292 45%
$250 - $500 MM 644 276 43%
$100 - $250 MM 761 276 36%
$10 - $100 MM 1,494 314 21%
<$10 MM 1,699 23 1%
All 7,803 2,890 36%

Source: Data provided by services, Author Calculations. Throughout this exercise, I've included MLPs and other forms so their dividends are really distributions. These figures also include many foreign stocks as well. In terms of distribution of dividend-paying "stocks" they have limited impact. Data is as of March 28, 2013.

So 36% of all companies paid dividends, while almost 90% of the over $20 billion market capitalization companies paid dividends. The second chart shows the market capitalization weighted dividend yield.

Average Dividend Yield
Group Aggregate Market Capitalization ($ Billions) Weighted Average Dividend Yield
$20+ Billion 24,595.0 2.4%
1000-20000 million 11,127.9 1.8%
500-1000 million 469.9 1.7%
250-500 million 228.8 1.8%
100-250 million 128.6 1.6%
10-100 million 64.8 2.0%
Under 10 million 3.2 0.3%
Total 36,618.2 2.2%

Source: Data provided by services, Author Calculations. The total is higher than the US aggregate equity market capitalization due to the inclusion of a large number of foreign stocks that tracks. Some names include Nestle (OTCPK:NSRGY) and L'Oreal (OTCPK:LRLCY). Data is as of March 28, 2013.

This chart shows that mega-cap stocks on average also provide the best dividend yields, while micro-cap stocks tend to offer poor dividend yields on average. It should be noted these averages include many stocks that do not pay dividends, raising the question that if a stock pays a dividend what does that yield look like.

Dividend Yields can Vary Significantly by Sector

The following graphic shows the distribution of dividend yields plotted against market capitalization (on a logarithmic scale.) I've color coded the top three sectors for dividends: utilities, oil & energy, and finance.

Source: Data provided by services, Author Calculations. It should be noted that the other stocks are below the finance stocks, which appear to cover everything. Data is as of March 28, 2013.

This graphical display shows the clear upward skew for dividends in these sectors. It also shows that the utilities and Oils & Energy tend to be composed of larger companies. It also shows that there are quite a few high dividend yield stocks outside the top three categories. The following table shows the details by sector.

Dividend Yield Data by Sector
Zacks Sector Aggregate Market Capitalization ($ Billions) Total Number of companies Dividend Payers Percent of Total Average Yield*
Utilities 2,124 224 158 71% 4.2%
Oils-Energy 4,581 603 229 38% 2.9%
Finance 7,596 1,885 1,194 63% 2.5%
Consumer Staples 3,150 272 129 47% 2.3%
Basic Materials 1,967 423 158 37% 2.2%
Conglomerates 895 44 32 73% 2.2%
Aerospace 361 81 24 30% 2.0%
Medical 3,289 895 83 9% 2.0%
Industrial Products 968 413 138 33% 1.8%
Computer and Technology 4,832 1,334 216 16% 1.7%
Transportation 665 186 84 45% 1.6%
Retail-Wholesale 2,204 398 131 33% 1.5%
Business Services 781 278 81 29% 1.4%
Consumer Discretionary 1,734 486 132 27% 1.4%
Construction 409 169 62 37% 1.4%
Auto-Tires-Trucks 1,062 99 39 39% 1.2%

Source: Data and sector classifications provided by services, Author Calculations. This table excludes 13 companies with an aggregate market cap of just under 1 billion that were in unclassified or unknown sectors. *Average yield is a market cap weighted average yield across all companies. Hence a sector like Medical with a relatively small number of dividend payers, but an average overall yield means the dividend payers are the largest companies. These 83 companies represent 73% of aggregate market capitalization. Data is as of March 28, 2013.

Some of the top dividend yielding utilities are France Telecom (FTE), VimpelCom Ltd (VIP), and GDF-Suez (GDFZY.PK). It should be noted that these companies often carry risks. For exampled, FTE might have an attractive yield, but is also an example of a company with a declining stock price - which makes the yield higher. Companies with large market capitalizations and above average yields would include AT&T Inc. (NYSE:T), Deutsche Telekom (OTCQX:DTEGY), Telstra (OTCPK:TLSYY), Entergy Corp. (NYSE:ETR). It should be noted that "Utilities" includes power, gas, water, and communications. These types of businesses typically are stable and can provide reasonable dividends; however, their stock prices might fluctuate. Note that I am distinguishing between more stable fundamentals and how the market might value those fundamentals.

Some of top dividend yielding Oils & Energy stocks are more familiar names to dividend investors, including Seadrill Ltd. (NYSE:SDRL) with a TTM dividend yield of approximately 9.6%, Chevron Corp. (NYSE:CVX) with a TTM yield of 3.1%, and ConocoPhillips (NYSE:COP) with a TTM dividend yield of 4.5%. It should be noted that my SDRL TTM dividend yield was adjusted downward to exclude the accelerated dividend payment. Also included in this group are a range of partnerships that pay distributions in lieu of dividends. These entities typically provide a substantially higher yield, but with a different set of risks and accounting requirements.

Part three of this series will dig into specific sectors in more detail with a goal of finding good dividend yields in less examined industries (industries are subgroups within sectors). It will also deep dive into the Utility sector as well.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.