Dividend Stocks: The Seven Percent Solution

Includes: MO, SDRL, T
by: eChristian Investing

For new dividend investors, trying to select which stocks to invest in can be a daunting task. At last check, there were over 3,000 stocks offering dividends of some shape or size. These can range from miniscule dividends like Bank of America’s (NYSE:BAC) current $.01 per share quarterly dividend, to stocks offering double digit dividend yields like Annaly Capital Management.

Given the wide range of investment choices, it’s hard to know which dividend stocks are the best value.

Many investors end up just focusing on the stocks that pay the highest dividend yields. Sure a stock with a double-digit dividend yields looks attractive, but these stocks generally contain the greatest risks. Typically their dividend yield is so high, because their stock price has been falling. Often times, this is a warning signal that the dividend is likely to be cut anyway (BP (NYSE:BP) anyone?).

At the other extreme, investors focus only on stocks paying marginal dividends. There are certainly a lot of these stocks out there, with the S&P 500 stocks paying only a 1.8% dividend yield on average. Stocks with low dividend yields aren’t bad if the company is committed to increasing their dividend each year. Unfortunately, many are not. There are only 43 dividend aristocrat stocks in the S&P 500 with a long-term track record of increasing dividends.

Possibly the most attractive area for dividend investors are stocks with dividend yields around 7%. These are typically companies that are committed to returning cash to their shareholders, but they don’t include the high risk of double-digit dividend stocks.

The most attractive aspect of these stocks maybe the compounding power of 7% dividend yields. Any investment that provides a 7% annual return will double in 10 years. By buying a dividend stock with a 7% yield, you stand to double your investment in a decade even if the stock price doesn’t budge. A 100% return sounds really good when you consider that the S&P 500 index has fallen 24% in the last 10 years.

Here are 3 stocks with dividend yields near 7% for you to consider:

Altria (NYSE:MO) – 7.0%

The addictive power of Altria’s products makes MO quite possibly the safest dividend stock in the S&P 500.

AT&T (NYSE:T) – 6.6%

The telecom giant has the second highest dividend yield in the Dow Jones index.

SeaDrill (NYSE:SDRL) – 8.4%

With virtually no presence in the Gulf of Mexico, this offshore driller has been unaffected by the recent BP fiasco.

Disclosure: Author long SDRL