We’ve already discussed blue chip stocks. They’re ultra-secure industry-leaders with stable growth and massive market capitalization. It’s worth having some of these companies your portfolio to provide stability. A certain portion of your portfolio can grow slower and face volatility if you invest it in some sturdy blue chip. But you can use blue chips for more than just stability. These companies can genuinely enhance the income you generate from the portfolio.
By design, these massive cash-rich companies can offer something prime property and bank savings accounts have failed to deliver over the past few decades – high yields.
Here’s how you can pick the best blue chip high yield dividends:
It’s Not All About The Yield
Dividend investing is certainly not about blindly chasing the highest yields. A lot of companies and real estate investment trusts pay out dividends that are simply too good to be true. Some even borrow to finance high dividends and others spend nearly every penny they earn in paying back shareholders.
The problem with this strategy is that business is often unpredictable. A small bump in earnings or a sudden change in the nature of the business can have a serious impact on the dividend rate.
For example, 30 companies on the S&P 500 index have paid dividends while losing money every year. General Electric has actually paid $6 as dividends for every $1 of earnings over the past year. ConocoPhillips, Kraft Heinz’s, and Halliburton all have negative dividend payout ratios. High yield stocks like Western Digital (NASDAQ:WDC), Frontier Communications (NASDAQ:FTR), and Guess (NYSE:GES) are so risky and unsustainable that Wall Street experts tend to call them ‘dividend traps’.
Trailing Yields Are Important (But Not Everything)
A history of high yield and consistent dividend payments is important, but only up to a certain extent.
Dividend history can tell you a lot about the management’s attitude towards shareholders and the general earnings and payout trend, but they can’t tell you about the risks the company may face going forward. For example, Exxon Mobil was an excellent buy for many years and had an incredible dividend policy but you wouldn’t have foreseen the sudden crash in oils prices that hit the company’s stock since 2014. Despite a high 3.4% average dividend yield between 2014 and 2016, the total return (which includes dividends) of XOM was less than the total return on the S&P 500 over the same period.
The amount of cash and marketable securities on the books has a serious impact on the dividend policy of any company.
A blue chip high yield dividend is sustainable if it is supported by a tremendous cash pile. Research since the 1960’s has shown that company managers often declare a dividend or increase the rate if they are confident about the future earning potential and current financial health of the company.
A quick dividend health check-up should include some inspection of the amount of cash on the books. Too much cash is a clear sign the company will boost the dividend or start a buyback program for the benefit of the investors.
Apple (APPL) is the best example of this. It currently has a record $237.6 billion in cash. It’s dividend and share buyback program have cumulatively returned $200 billion in cash since 2013. Apparently the stock is so deep in value and dividend territory that even Warren Buffet couldn’t resist adding it to the Berkshire Hathaway portfolio.
Industry Prospects (Growth)
You blue chip high yield dividend stocks need to keep up with inflation. The earnings need to grow so that dividends can increase year after year. So, look out for the growth prospects in the industry before you invest in a blue chip. Even the most well-recognized and stable blue chip will fade away if the nature of their industry changes.
Kodak is a good example. Eastman Kodak was a thorough blue chip company that went bankrupt after the industry shifted to digital photographs.
Keep an eye out for the trends that are shaping the industry you pick. If there’s any reason to worry, stay away from the stock no matter how secure their current position or how high the dividend yield.
Best Examples of High Yield Blue Chip Stocks
Here are some of the best blue chip high yield dividend stocks that you should consider:
Johnson & Johnson (JNJ): a 2.6% dividend yield isn’t particularly impressive, but the company has a well diversified portfolio of healthcare brands that can help it sustain this rate long-term.
Altria: Altria has had a phenomenal run off the success of Marlboro cigarettes. It’s managed to grow 20% compounded every year since the 1970’s. Tobacco is a highly regulated market with fantastic margins and a loyal customer base. That’s what lets the company offer a 3.6% dividend yield.
Boeing: The aircraft manufacturer operates in an industry with only one other serious competitor – Airbus. The company offers a 3.2% dividend yield, a fairly impressive order book for future orders, and nearly 8% annual compound growth in core earnings. It starts 2017 with more than $500 billion worth of orders in backlog.
Blue chip high yield dividend stocks offer the best of both worlds. They can help you balance a good growth rate with high income and less risk. Take the time to do your research and pick out blue chip companies that are likely to maintain their success over the long-term.