Even though volatility has been near record highs over the last 10 weeks, the stock market is at the same level now as it was in early August. During that time, a number of stocks have skyrocketed as others have hit new lows. If you are lucky enough to keep pace with the overall market, your portfolio is likely flat.
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This is just one reason investors are on the hunt for stocks that pay above-average dividends to help inflate the return of their portfolio. The payment of a dividend does not necessarily suggest the stock will have less volatility, but it does give investors a reason to be okay with a flat market.
To lower the volatility even more investors could turn on an exchange-traded fund (ETF) that is composed of a basket of individual stocks. This will eliminate the company-specific risk associated with buying a stock. (For related reading, see Using ETFs To Build A Cost-Effective Portfolio.)
The iShares High Dividend Equity ETF (NYSE:HDV) is composed of 76 stocks that pay a relatively high dividend yield on a consistent basis. The stocks come from the Morningstar U.S. Market Index, which encompasses 97% of the market capitalization of the U.S. market.
The ETF charges an expense ratio of 0.4%, and trades with a price-earnings ratio of 14.5. The current 30-day Securities and Exchange Commission yield is 4.0%, a decent dividend considering the rates available in the fixed income arena.
Four stocks that are included in the top 10 holdings of HDV are candidates to consider, if the individual stock route is chosen. The top holding is telecom giant AT&T (NYSE:T). The stock makes up 10% of HDV and currently pays a dividend of 5.9%. Year-to-date the stock has a small loss, but as long as AT&T holds above long-term support at the $27 area, it will make investors happy with the large dividend yield.
The number two and number four holdings of HDV are Pfizer (NYSE:PFE) and Johnson & Johnson (NYSE:JNJ). The two health care companies, and its peers, make up the sector with the largest exposure in the ETF, accounting for 26 percent of the allocation.
Pfizer currently pays a 4.2% dividend and is having a decent 2011, gaining over 8% so far this year. After struggling for 10 years, the stock began the most recent uptrend in 2009, and it continues to look like a stock that has more upside, especially considering the attractive dividend.
JNJ has not performed as well as Pfizer this year, up only 1%, but it has outpaced the overall market. The dividend yield currently stands at 3.5%. The most recent earnings report from JNJ showed that profit fell by 6%, in the quarter, as sales increased. An increase in foreign sales could not offset the rise in foreign competition, and the cost of an acquisition. The day of the earnings report, the stock rose 1%. (Find out which companies collapsed after merging. For more, see Biggest Merger and Acquisition Disasters.)
The one company that can likely brag that it has a product in your home somewhere, at all times, is Proctor & Gamble (NYSE:PG). The brands made by the company include Gillette, Crest, Pringles, Bounty, Pampers, etc. Their products are sold in approximately 180 countries worldwide. The stock is up less than 1% on the year, and has a dividend yield of 3.2%. A breakout above the $68 area would trigger a new buying signal for potential buyers.
The Bottom Line
The stocks mentioned above are not the next big growth stories in the market. However, they do provide stability and have large market shares. The dividends are above average because of the steady cash flow the company generates due to the lack of growth prospects that cash is paid to investors via dividends. There is a place for both growth and income stocks in most investors' portfolios. This list accounts for the steady income-producing portion of the portfolio.
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