Great Dividend Yield Payouts

By Peter Cherewyk | August 22, 2010 AAA

The economic turmoil and subsequent stock market volatility does not mean there has been a lack of investing opportunities. The decline in share prices has resulted in relatively high dividend payouts compared to share prices. Many traders have moved over to the investor camp looking for longer-term horizons. In good times more risk can be taken. But for now, let's look at a couple of companies paying holders a healthy dividend.

Bristol-Myers Squibb (NYSE: BMY) is paying its shareholders a dividend yielding 4.8%, or a $1.28 dividend from an expected $1.84 to $1.94 EPS for 2010. The payout ratio is around 67%, so the company has decided its best use of the earnings should be decided by the holders.

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Low Payouts

A couple of companies paying out low percentages of earnings but still yielding high are keeping cash for growth. Aircastle (NYSE: AYR) offers a 4.8% yield and 34% payout, and Earthlink (Nasdaq: ELNK) offers a 7.5% forward yield and 22% payout ratio. The lower payout ratio could mean the company is investing back into operations; also, the earnings support the dividend. You wouldn't want to buy a dividend-paying stock only to discover it gets cut due to lack of earnings.

ConocoPhillips (NYSE: COP) has a decent dividend yield at 4.2% and retains 66% of earnings to grow the business. There is plenty of room in earnings before a dividend cut would occur. In huge companies, the dividend is sometimes better spent making the owners happy, or maybe the earnings couldn't be turned into enough profit to adequately pay back shareholders. (Learn more about these ratios and others for evaluating stocks in our Investment Valuation Ratio Tutorial.)

Higher Payouts

A higher payout isn't always a bad sign, especially in larger, well-established companies. For example, Bristol-Myers Squibb has a 67% payout. Southern Copper (Nasdaq: SCCO) pays out 72%, which is in the higher range, and yields 5% for investors. It has missed estimates in the last two quarters, and third quarter numbers are due out October 27 with analysts expecting 45 cents per share. Even though Southern Copper missed estimates, earnings were well above last year. In Q1, EPS was 45 cents versus 9 cents a year earlier. Q2 ending June 30 saw EPS of 37 cents versus 21 cents in the comparable period a year earlier.

Garmin (Nasdaq: GRMN) has a decent dividend yielding 5.5% going into the future, and the company pays out 68% of earnings. Next quarter, EPS estimates sit around 76 cents, which would be 25.5% below 2009 comparable period EPS of $1.02.

Dividends Must Be Sustainable

Dividend yields should not be the only metric you use to pick a stock. The dividend needs to be sustainable, and when it gets deposited in your account, you need to think about what you should do with it. Maybe the company can do a better job growing the earnings than you could, especially in this market.

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