High Yield Dividend Stocks It’s Always a Good Pick When The Market is Bullish

On Monday, I published an important compilation of strong dividend stocks per sectors. In total, I listed 390 dividend stocks in 11 charts for both American and Canadian markets. When I first started to work on this article, I thought of listing all dividend stocks and simply classify them per sector. Then, I realized there were WAY too many stocks and it was pointless to bombard you with 1,000 stocks (even 390 is a big number!). In order to make a good list, I used the following metrics:

#1 Dividend yield between 2.50% and 7% – I wanted to make sure we have interesting dividend stocks

#2 Payout ratio under 80% – I wanted to make sure the companies can continue to pay their dividends

#3 Positive Dividend Growth for the past 3 AND 5 years  – Here again, a good sign the company is in sound financial shape

The main goal was to highlight solid dividend stocks and give you a few ideas at the beginning of this year. I received a few comments saying that my dividend lists don’t include high yield dividend stocks. Another reader even mentioned that he would like to see more lists of 10%+ dividend yield stocks instead of the list I provided showing stocks paying as low as 2.50%. After all, I even picked Disney (DIS) in my portfolio in 2013 when it paid about 1% dividend yield. You can guess I’m not too favorable regarding high yield dividend stocks. But since I’m a good guy, I decided to write a paper about the high yield dividend stocks and I’m giving away my favorite picks for high yield dividend payers at the bottom of this post.

HIGH YIELD DIVIDEND STOCKS DON’T SHOW THEIR REAL FACE RIGHT NOW

Some investors may disagree with me, but I don’t think it’s fair to consider how high yields are doing during a bull market. In fact, during a bull market, everybody is happy and stocks keep climbing. But what makes a for a bull or bear market?

It’s a combination of many things. Technically, we need companies showing strong sales and profits while economic indicators such as unemployment rate, consumer confidence, manufacturing index, etc will confirm that sales will continue to grow and profits will follow.

Following this premise, when you are in a bull market, there is a general aura of good news for all companies. This is why don’t see the real face of many stocks during this period since we are looking at them through rose-colored glasses.

This is what is happening with high yield dividend stocks. When you look at a stock paying over 5% in dividend yield in this current market when you can’t even make 3% on a 5yr GIC, there must be a red flag popping up to tell you there is a risk premium. The problem is you won’t feel the risk premium during a bull market as all stocks go up or are artificially maintained by this aura of good news.

Therefore, for several years, sales can be flat, dividend growth non-existent and dividend payout ratio very high (read over 100%) and nothing will pop on your screen. In fact, you will be very happy to receive a 10% distribution for a few years and you may even start thinking this is the way to go. The first red flag should be how the stock reacts to the current market. Last year is a great example to see if you are holding a high dividend yield stock that will plunge once the market slows down. Why? Because, it was probably the best year of the decade in terms of returns. The US market hit +30% in 2013. If your stock paying 8-9% dividend yield and barely finish the year in black, there is a problem. When the market is up by that much, you should expect all your stocks to go up. If some of them don’t, it’s because there is very bad news associated with them.

In 2013, would you prefer a stock that is up by 30% and pays a 3% dividend yield or a stock that is up 3% and pay a 10% yield? I would take the first stock in a heartbeat. But not because of the total return. That’s important but there is more to it. How do you think the second stock will react during a 15%-20% correction? There won’t be the good news aura anymore and this stock may flunk big time. On the other hand, the stock that was up during the bull market probably shows strong fundamentals that will help it weather a recession. The high dividend yield stock will probably show its true face including financial complications, dividend cuts and a big stock drop. In other words, the risk of buying high dividend yield is way higher than you think.

DOES IT MEAN ALL HIGH DIVIDEND YIELD STOCKS SHOULD BE BANNED FROM MY PORTFOLIO?

No, there are good stocks paying a high dividend yield. But in most cases, these high dividend yields are temporary. The best example I could think of was Seagate Technology (STX) a couple years ago. It was paying in the range of 6% dividend yield due to an important stock value drop. However, the company was able to get back on track and readjust. Today, the stock is now paying a 2.90% dividend yield and the value is up by 203% over the past two years.

But the classic high dividend yield looks more like RioCan (REI.UN) a Canadian REIT showing a negative return of -4.25% over two years (compared to +12.05% for the Canadian Index) and a dividend yield of 5.56% while the dividend payout hasn’t moved over the past 2 years. All that to say when there is a high yield; there is also something else hidden. However, if you look at companies carefully, it is possible to find strong companies that went through a rough time and show a great buying opportunity.

2014 BEST HIGH YIELD DIVIDEND STOCKS

Even though I’m not a big fan of high dividend payers, I’ve made an effort to dig further and find interesting companies that are worth a further look into their fundamentals. I’m sharing with you only a part of a better list (with additional metrics) that we maintain weekly at our premium dividend site; Dividend Stocks Rock. We have built a list where we look for relatively strong metrics combined with a higher dividend payment. The key was to find a balance between the risk of a high dividend yield stock and the strength of a stronger company with weaker payouts. Let me know what you think of our list!

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