The market's violent rebound since the March 23 lows has
been a welcome relief for long-term shareholders and a boon for dip buyers. But
one group of investors has actually been put out by the rally: income investors
looking to put dry powder to work in high-dividend stocks.
As the S&P 500 has crashed and recovered, its yield has
whipsawed. The blue-chip index yielded roughly 1.8% to start 2020, jumped all
the way to 2.3% as of March, and has dipped back below 2%. That might not sound
like much, but remember: That's the average among 500 large-cap companies. The
swings across the broader stock market have been much more pronounced, and
several high-yield dividend opportunities have disappeared as a result.
Several … but not all.
Hundreds of high-dividend stocks still deliver payouts of
more than 5%. The problem is that some of those dividends belong to distressed
companies that might not be able to continue funding their ample cash
distributions.
One way to protect yourself is to prioritize signs of
dividend health, using the DIVCON system from exchange-traded fund provider
Reality Shares. DIVCON uses a five-tier rating to provide a snapshot of companies'
dividend health. DIVCON 5 indicates the highest probability for a dividend
increase, while DIVCON 1 signals the highest probability for a cut. Within each
of these ratings is a composite score determined by free cash flow-to-dividend
ratios, profit growth, stock buybacks (which companies can pull back on to fund
a dividend in a pinch) and other factors.
Here are seven high-dividend stocks that have been
identified for their payout strength. Nothing is certain, of course – so far
this year, a few companies with well-funded distributions nonetheless pulled
the plug to ensure their survival throughout the pandemic. Still, each stock
has a rating of DIVCON 4, which signals a healthy dividend not just likely to
survive, but to grow.
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