With six-month Treasurys yielding just 1. 57 percent and two-year notes at 1. 96 percent, retirees and others seeking steady income are...
With six-month Treasurys yielding just 1.57 percent and two-year notes at 1.96 percent, retirees and others seeking steady income are looking to riskier fare, such as dividend-paying stocks.
But high-yielding choices are limited. Just 14 percent of U.S. stocks yield over 6 percent, according to Morningstar. More than 55 percent of those are in financial services, a sector reeling from the mortgage crisis.
Morningstar equities strategist Josh Peters says investors should look for strong cash flow and earnings-growth potential.
He adds that a high dividend means little if liquidity issues force it to be cut: “That risk gets higher and higher as the yield goes up.”
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He suggests energy, selected banks and consumer-staples stocks to balance out a dividend-oriented portfolio. He’s wary of real-estate investment trusts, utilities and “sketchy” financial and energy firms.
“In general, I tend to be very skeptical of any stock that yields greater than 8 percent,” he says.
Frank Ingarra, assistant portfolio manager of Hennessy Funds, says cherry pickers in financial services need to watch for rotten fruit.
Bank of America (BAC) offers the highest yield among the Dow industrials but has not weathered the economic downturn as well as JPMorgan Chase (JPM), which yields far less. Bank of America is down 22 percent in the past year; JPMorgan has lost 7 percent.
“If investors are looking for a home run tomorrow, I can’t tell you which of these stocks is going to be a home run,” Ingarra warns. “You’re buying time to collect the dividend until the market turns around and these stocks regain favor.”