Ten-year U.S. Treasury notes are now yielding more than 3%, which makes them more attractive for income-seeking investors than they have been for many years.
If you want to shoot for higher yields with dividend stocks, we have applied some stringent criteria to narrow a list.
Something to consider is that while 10-year Treasury notes TMUBMUSD10Y, -0.17%[1] recently yielded 3.07%, the yield on two-year Treasury paper TMUBMUSD02Y, +0.03%[2] was 2.58%. That is a very narrow spread, considering how much more of a commitment you make if you’re in for 10 years.
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If you are considering common stock for higher dividend yields, you need to do your own research to form an opinion about how “safe” the company’s regular dividend payments are. What is the chance that the company may cut the dividend? A publicly traded company is likely to be cautious when raising its payout because of the terrible fallout for the stock price if they are forced to lower the dividend.
Two dividend screens
With the 10-year yield climbing above the 3% threshold for the first time since 2011[4], we looked at S&P 500 SPX, -0.09%[5] stocks with dividend yields of 4% or higher. This left us with a list of 43 companies.
We then compared the companies’ free cash flow yields with their current dividend yields. A company’s free cash flow is its remaining cash flow after planned capital expenditures. It measures how much money the company has available to pay dividends, buy back shares, expand organically, make acquisitions or for any other corporate purpose.
For real estate investment trusts, we used funds from operations (FFO) instead of free cash flow. FFO adds depreciation and amortization to earnings and subtracts gains on the sale of assets. It is a non-GAAP figure that is considered to be a good measure of how much cash a REIT has available to pay dividends.
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We calculated free cash flow yields by dividing free cash flow per share over the past 12 months by the closing share prices. If a company’s free cash flow yield is higher than the dividend yield, the company appears to have "headroom” to pay a higher dividend or at least maintain the dividend. This...