Finding High-Quality Income in a Zero-Rate Environment

When I started out in the industry almost 10 years ago, my specialty at the time was generating income through dividends investing and selling options.

And since then, the search for yield hasn’t gotten any less important. In fact, it’s gotten even more important as the average savings account interest has slid to essentially zero. Even CDs (certificates of deposit) don’t pay anything anymore.

In fact, CDs haven’t paid over 5% in the past 20 years!

The argument for dividend stocks in your portfolio is an easy one. If you’re in retirement, it’s a way to generate income. If you’re not in retirement, reinvesting those dividends can really supercharge your portfolio with compound growth.

Either of these dividend strategies require holding the stocks for a longer period of time. That means that you really want to make sure that the company is high quality and will continue to pay out that dividend over time.

When I’m looking for dividend stocks, I want to check for three different things ...

First, are they paying a decent yield? I want to be paid to keep my money in that stock for a longer period of time. Today, I plugged a 3.5% yield into the Weiss Ratings stocks screener.

Second, I want to make sure that the company’s earnings are growing. If earnings aren’t increasing, then the company won’t be able to keep increasing its dividend. Even worse, the company might have to cut or suspend its dividend — something many ended up doing during the pandemic. In May alone, 114 publicly traded companies cut their dividend, while another 125 omitted paying their dividends entirely.

Third, I check the company’s dividend payout ratio. The payout ratio is the percent of earnings that is paid out as dividends. Easily discard anything with a payout ratio over 1 or 100%. That’s a red flag that this dividend is not sustainable.

For today’s parameters, I went with 60%, which is a little higher than I normally look for but allows for the uncertain year that 2020 has been.

So, to recap, here are the parameters for today’s dividend stock screener:

  • Dividend yield above 3.5%
  • Earnings per share growth of at least 3%
  • Payout ratio of no more than 60%

Our top-rated stock for today is Verizon Communications Inc. (NYSE: VZ, Rated “B”).

I don’t need to explain this one much. We all know it’s one of the biggest communications companies in the world. Verizon has announced that it will pay a dividend of 62.75 cents to shareholders at the beginning of November.

That’s actually the company’s regularly scheduled dividend increase. This is important to stress in a time when even some of the biggest dividend stalwarts are cutting or suspending dividends.

Based on the company’s current price of $59.33, that’s an annual yield of 4.2%.

Add the fact that Verizon will be sure to profit from the race to 5G, and you’ve got a stock that not only pays dividends now but should see share price gains for years to come.

Next up, we’ve got Summit Industrial Income REIT (TSX: SMUUN, Rated “B-”). This real estate investment trust (REIT) focuses on growing and managing a portfolio of light industrial properties across Canada. REITs are common instruments for dividend investors because they legally need to pay out most of their gains to investors.

This one is on track to continue its monthly payments of C$0.045. That’s a 4.3% yield based on its recent stock price of $12.36.

Finally, we’ve got Emera Incorporated (TSX: EMA, Rated “B-”). Emera has approximately 2.5 million utility customers in Canada, the U.S. and the Caribbean. Utilities are known for their stability in rough times and for usually paying a dividend.

Emera just paid C$0.6125 to investors on Aug. 14 and hasn’t said anything about changing that strategy. That’s a yield of 4.4% based on recent share price near $54.45.

I’ll always be a firm believer that dividend stocks have their place in any portfolio. This is especially true if you want your money to do the work for you.

I highly recommend that you use the Weiss Ratings to make sure that your dividend payers are safe enough to store your money in for the long haul.

Best wishes,

Kelly Green

About the Research Analyst

Kelly completed the Series 7 and 66 securities licenses, and has worked in the financial publishing industry for eight years, specializing in income and options. She contributes regularly to the Weiss Ratings Daily Briefing.

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