In 2008, at the depths of the worst recession since the Great Depression, the Federal Reserve reduced short-term interest rates to basically zero to help stop the bleeding. The U.S. economy recovered nicely since that tourniquet was applied. But seven years later, short-term interest rates remain near zero.
That means the traditional avenues for earning interest on the money you save— certificates of deposit, Treasury bonds and money-market accounts—have been all but cut off. Income seekers hoping to save for retirement have had to turn elsewhere. The most logical place is dividend stocks.
As investors have gone hunting for dividend-paying stocks in recent years, more and more companies have initiated a dividend. Currently 421 of the companies that comprise the S&P 500 pay a dividend, the highest number since the turn of the century. But don’t let the high participation rate fool you. Not all dividend stocks are created equal.
Though 84% of all large-cap stocks now pay a dividend, the payouts aren’t particularly generous. The average yield among S&P 500 stocks is a mere 1.9%, roughly in line with the 10-year median. Meanwhile, the payout ratio among S&P 500 companies is 32%, only a few percentage points higher than the 10-year average (29%).
Some companies want to dangle the carrot of a dividend to attract more investors without really rewarding those shareholders in a meaningful way. A 0.8% yield technically makes a company a dividend payer, but it’s not an amount that should entice you to buy the stock. Other companies may offer eye-popping yields—6%! 7%!— that aren’t sustainable because the company simply isn’t making enough money.
Those are dividend stocks you should avoid—rather, consider “dividend aristocrats” for your portfolio!
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