NEW YORK (TheStreet) -- Investors bruised by the recent stock market correction have turned to dividend-paying stocks for stability, and several under-$5 names like Chimera Investment (CIM) offer outsized dividend yields to those willing to take the risk.
Dividend stocks are attractive during times of uncertainty because of the consistent cash payout. While share prices can move sharply, as evidenced in the so-called "flash crash" on May 6 when the Dow Jones Industrial Average dropped nearly 1,000 points intraday, dividends typically hold steady. Over the last month, the Dow has fallen roughly 10%, putting the index in correction territory.
"When the markets start correcting, investors normally gravitate toward more defensive stocks," says Paul Nolte, managing director with Dearborn Partners. "Those defensive stocks typically have consistency in earnings and a bulk of them pay dividends and may even increase dividends. Investors can get money while they're waiting for the market to turn around in addition to owning a company that has a pretty good earnings flow."Some companies, like Dow members Verizon (VZ), Pfizer (PFE) and Kraft Foods (KFT), offer steady returns through dividends. But for several stocks trading under $5, the dividend yield -- and risk -- are much greater. For long-term investors, the recent pullback has afforded a lower entry point in several high-yielding dividend stocks under $5, including Chimera, Universal Insurance Holdings (UVE) and Primedia (PRM). Nolte warns that investors looking for dividend-paying stocks that trade below $5 should look at potential candidates closely to see if the dividend will be safe. "What you have to look for more than anything is coverage, meaning is the dividend covered by cash flow and/or earnings," Nolte says. "What you don't want is to buy a company that is paying out 20 cents a share only to have the dividend cut to a nickel or a penny or even eliminated altogether." TheStreet narrowed the vast number of dividend-paying, under-$5 stocks by including only those companies based in the U.S. with a yield above 2%. Continue on to view the top dividend stocks trading below $5, sorted by annual yield. >>Find Ex-Dividend Dates With Our Dividend Calendar
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