Rising stock prices have an inverse effect on dividend yields. The nearly 10% advance in the U.S. stock market YTD has reduced the overall yields offered by equities. Still, attractive yields remain and investors may find them worthwhile opportunities.
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The Dividend Value Equation
The old school value equation stipulates that to value a stock one needs to discount the future value of the dividends paid. Dividends are real cash distributions. Earnings are generally real, but can vanish if management makes poor capital allocation decisions. As a result, the company's share price can shrink just as quickly. It's no coincidence that some of the best long-term returns come from companies with a long history of dividends.
SEE: Why Dividends Matter
If you can be patient and handle the volatility, then oil rig operator Transocean (NYSE:RIG) has a roughly 6.2% yield. In the short run, RIG shares could drop by more than 6% due to the inherent volatility of the oil industry, as well as specific issues relating to the company and an oil spill two years ago; however, demand for deepwater rigs will be strong in the future and RIG leads the pack.
Most investors will probably be more comfortable with Verizon Communications (NYSE:VZ); its hard to ignore an approximate 5.3% yield. Verizon owns nearly half of Verizon Wireless, the largest wireless carrier in the U.S. Thanks to increasing data usage from more and more smartphone users, revenues are set to grow over time; and thanks to Apple (Nasdaq:AAPL) and the iPad, more subscribers are signing up for data plans. Apple is selling iPads at a blistering pace and many of them will create new usage fees for Verizon and AT&T (NYSE:T), which also yields a juicy 5.7%. Both VZ and T are blue chip type names with dividend yields two to three times higher than many comparable blue chip companies.
The Bottom Line
You can never dismiss the value of dividends over time. Today with current historic low rates, the opportunity to own high quality equities with bond like yields will not be a option that will last indefinitely.
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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.