High-Dividend Stocks An Endangered Species

Jim Jubak MSN Money April 9, 2010

Not long ago, such shares roamed the market in abundance, but their very popularity has shrunk their numbers. To find them now, you'll need to expand your search.

It's getting harder and harder to find a stock that pays a decent dividend. At least if you look in the usual places.

What's that you say? Look in the unusual places? Couldn't agree more. That's exactly what I'm aiming to do here. But the task isn't getting any easier: The song the market's singing right now is "Where Have All the High Dividend Yields Gone?"

How to find dividend stocks

My screen isn't especially innovative. It follows the tried-and-true formula of looking for the stocks of companies that have raised dividends faster than 75% of their dividend-paying peers over the past five years and that have raised their dividends faster than 50% of dividend-paying companies in each of the past three years.

A big New York investment house, Oppenheimer, recently ran a similar screen over the past 20 years. It found that among the stocks in the Standard & Poor's 500 Index ($INX), those that ranked in the top fifth for dividend growth beat the S&P 500 by 7 percentage points a year, on average.Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 304, 314, {"configCsid": "MSNmoney", "configName": "player-money-4x3-articles-inline", "player.vcq": "videoByUuids.aspx?uuids=11c68d9c-b655-4639-8bd4-01fe51a5832e,d07efe90-f81d-4ca2-b181-d915a6807d18,7eab57c0-1b98-4f4a-8e4c-8ebb297da0c1,98512743-495b-43b8-b1b1-3da106ecac84,da5fe5e7-4693-4999-932a-f171cf26b701,ece044c8-ef92-40d6-83f5-f454ad6365b9,4b4e2422-898c-43f6-a1b7-c4a51ed874bb,576b0d3b-854b-4233-bdd1-635468cb1f76,7b3155cc-82ab-4c30-8017-3634aec91ec8,bcff32e7-4016-405d-af90-ce41a8a8875d", "player.fr": "iv2_en-us_money_article_Investing-JubaksJournal-inline"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=11c68d9c-b655-4639-8bd4-01fe51a5832e,d07efe90-f81d-4ca2-b181-d915a6807d18,7eab57c0-1b98-4f4a-8e4c-8ebb297da0c1,98512743-495b-43b8-b1b1-3da106ecac84,da5fe5e7-4693-4999-932a-f171cf26b701,ece044c8-ef92-40d6-83f5-f454ad6365b9,4b4e2422-898c-43f6-a1b7-c4a51ed874bb,576b0d3b-854b-4233-bdd1-635468cb1f76,7b3155cc-82ab-4c30-8017-3634aec91ec8,bcff32e7-4016-405d-af90-ce41a8a8875d;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');It's not rocket science, but it works. Or at least it used to.

What's happened? The financial crisis and the Great Recession have made high-dividend stocks extremely popular. And you know what happens when a dividend stock becomes popular, don't you? It goes up in price and down in yield.

Consider PepsiCo (PEP, news, msgs): The stock was up 9.1% in the six months ending April 6. That gain has driven the yield from a none-too-generous 2.96% to an even-less-generous 2.71%.

Dividend stocks such as the ones that used to show up on my screens in larger numbers would be especially valuable now. Interest rates on long Treasurys are rising; the yield on the 10-year Treasury broke 4% last week.

Now, 4% isn't bad when inflation is so low. But if rates keep rising -- and I think they will even as the Federal Reserve keeps short-term rates near zero -- then any bond you buy today will sell for a lower price tomorrow. Of course, you can just hold to maturity and avoid that problem, but 10 years is a long time to be content with just 4%. (For more on the rising yield on the 10-year Treasury, including my take on how fast interest rates will rise, see this post on my Web site.)

And the picture is even grimmer than my screen indicates. Many of the ol' reliable dividend stocks are in industries where the cash flows available for dividends are shrinking because companies are facing huge bills for capital spending.Click graphic to see interactive chartVerizonTelecommunications companies are looking at giant investments in their networks. If they don't make them, competitors will leave them behind for the crows to pick at. Only the strongest companies in the industry have enough cash flow to cover capital-spending plans to continue the high yields that this industry historically delivered. So, yes, Verizon (VZ, news, msgs) still yields 6.04%, but Sprint Nextel (S, news, msgs) pays no dividend at all.

The drug industry and the banking sector, both former strongholds of high dividend yields, show similar stress.

So what do you do if you still want fat dividend yields? You expand your search beyond the usual suspects that stock screens pull up.

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