BIG Dividends, BIG Returns

By Arthur Pinkasovitch | October 22, 2010 AAA

Accidental high yielders, by definition, are stocks that carry abnormally high dividends due to a fall in price that increased the dividend yield. Although the actual dividend payment remains the same, these shares artificially appear more attractive since a high percentage of earnings is paid out to shareholders. While accidentally high yielding stocks may in fact maintain the original dividend policy and even give investors hefty capital gains, a prolonged depression in the stock price will often be followed by a dividend cut.
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On the other hand, stocks that are on the upswing and continue to offer investors high dividend yields may raise their payouts if the upward trend in share price is justified by a proportionate increase in earnings. The table below shows eight stocks that have had a solid performance over the last quarter and carry significant dividend yields. Both technical and fundamental investors should take note.

Attractive Dividends, Attractive Returns

Company Quarterly Performance % Yield % Industry
ConocoPhillips (NYSE:COP) 16.20 3.6 Oil and Gas
Chevron (NYSE:CVX) 15.48 3.4 Oil and Gas
Du Pont (NYSE:DD) 26.02 3.5 Chemicals
Huntsman (NYSE:HUN) 32.92 3.2 Chemicals
Johnson & Johnson (NYSE:JNJ) 12.59 3.4 Drug Manufacturer
Pfizer (NYSE:PFE) 20.55 4.0 Drug Manufacturer
Lorillard (NYSE:LO) 11.23 5.4 Cigarettes
Altria Group (NYSE:MO) 15.91 6.1 Cigarettes

Oil and Gas Dividends
Both ConocoPhillips and Chevron are fairly priced, trading in a similar price-to-earnings multiple range of 10, 9.99 and 10.19, which is on par with the oil and gas industry. From a multiple perspective, neither firm has an obvious advantage over the other. While COP appears to be trading at a discount (at least compared to Chevron) based on its P/S and P/B ratios, CVX is trading at more favorable cash multiples.

Major Diversified Chemical Dividends
Comparing Du Pont and Huntsman Corporation proves to be a little more difficult. Based on fundamental multiples valuation, HUN appears to be a better bargain, as it is trading for a cheaper price for its sales, book value and cash position. However, while Huntsman has had an impressive three-month run where its stock appreciated by over 30%, the leader on the list lost money in two of its last four quarters. On the other hand, Du Pont was not only profitable but it also easily exceeded analysts' estimates in all of its earnings announcements last year.

Healthy Dividends
Depending on one's investment philosophy, choosing between those firms that are in the cigarette industry and those who manufacture drugs may be an easy decision. For investors practicing an ethical investment approach, the decision is a no-brainer. On the other hand, those seeking to maximize their dividend income would be attracted to the high payouts of Lorillard and Altria Group. From a fundamental perspective, the two pairs of corporations are actually similarly priced in terms of their price-to-earnings and other aforementioned ratios.

Bottom Line
High dividend paying stocks are present across multiple industries. But beyond the dividend, investors must analyze balance sheet strength to ensure that dividend income will not be accompanied by capital losses.

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