To achieve superior returns through bull and bear markets alike, investors should look to stocks with the very highest dividend yields, according to a new study by Dow Theory Forecasts, an investment newsletter published since 1946, as reported by Barron's. The study finds that a portfolio of such stocks has beaten the broad stock market, as measured by the S&P 1500 Index, by an average of 1.3 percentage points per year since 1990.

Writers of the Dow Theory Forecasts believe in the usefulness of the Dow Theory, developed by Dow Jones & Co. Inc. co-founder Charles H. Dow, as a tool to analyze and predict market trends. Their picks have outperformed the S&P 500 Index (SPX) since 2003, according to their website. (For more, see also: Top 3 Dividend Stocks in 2017.)

Five Picks

Barron's columnist Mark Hulbert identified the five stocks that have the highest yields in the S&P 1500, and which also are recommended by at least one of the top-performing newsletters that he tracks. These are, with their current forward dividend yields, forward P/E ratios and 52-week share price movements through December 6:

  • Washington Prime Group Inc. (WPG), a mall and shopping center REIT: 14.2% yield, 35.7 P/E, 33% loss
  • Consolidated Communications Holdings Inc. (CNSL), a broadband provider: 12.3% yield, 38.4 P/E, 54% loss
  • Seagate Technology PLC (STX), a data storage device maker: 6.4% yield, 9.4 P/E, 3% loss
  • Hersha Hospitality Trust (HT), a hotel REIT: 6.3% yield, -217.8 P/E, 17% loss
  • Macy's Inc. (M), leading department store chain: 6.3% yield, 9.7 P/E, 42% loss

The stock data above is per Thomson Reuters, as reported by Yahoo Finance. The S&P 500 gained 19% during the same 52-week period.

Dividend Cuts May Loom

Over the years, many individual stocks in the theoretic portfolio analyzed by Dow Theory Forecasts lost money when their dividends were cut or eliminated, Hulbert notes. However, the high dividend payments overall were enough to compensate. Still, the highest-yielding stocks often are distressed companies, such as General Electric Co. (GE) recently, that are ripe for a cut. Indeed, Dow Theory Forecasts put stocks yielding at least 8% in its theoretic portfolio, raising the odds of a dividend cut, Hulbert adds.

Small Universe

Only 24 stocks in the S&P 1500 had yields above 8% as of November 29, the date of Hulbert's column, per data provided to him by FactSet Research Systems Inc. The average since 1994 has been only nine at any one time, according to the same sources.

High Return, High Risk

Stocks that yielded over 8% as of October 2007 fell 63.1% to the March 2009 bottom, versus a 53.8% decline for the Dow Jones Industrial Average (DJIA), per FactSet data as reported by Hulbert. The reason: these lofty yields often are indicative of risky troubled companies rather than conservative investments. Four of the five stocks highlighted above owe their handsome dividend yields in part to big declines in their share prices during the past 52 weeks. Macy's and Washington Prime are members of the deeply troubled retail sector, a reason for additional caution in their regard. (For more, see also: Are Retail Stocks the Next Subprime Meltdown?