In the hunt for dividend yield, Wells Fargo says investors should seek out higher yields. This may seem like a no-brainer, but Adams and her team make the distinction of comparing current dividend yields up against other sources of income.
For example, Adams notes that there are currently 227 companies in the S&P 500 that offer a dividend yield that is higher than the 10-year U.S. Treasury yield. Of those, 51 offer a dividend yield higher than AA-rated corporate credit.
Adams drilled down further and found more than a dozen companies in the S&P 500 with a dividend yield that is higher than the average corporate credit yield for companies of a similar rating. Merck (MRK) tops that list due to its strong credit rating of Aa3. According to Moody's, corporate credit rated Aa3 has an average bond yield of 4%, below the 4.3% yield on Merck shares currently.Moving down the list, A2- and A3-rated corporate bonds have an average yield of 4.4%, which is below the dividend yields of AT&T (T), Eli Lilly (LLY), Pitney Bowes (PBI), Avon Products (AVP) and Verizon (VZ), among others. Corporate debt rated Baa3, Ba1 and Ba2 have average yields of 5.9%, a yield outpaced by dividend-paying stocks like CenturyLink (CTL), Frontier Communications (FTR), Windstream (WIN) and Wynn Resorts (WYNN). However, Adams doesn't make specific mention about the durability of a dividend payment for some of the high-yielders. My colleague Lindsey Bell recently noted that while Frontier Communications has the highest yield in the S&P 500 at 18%, the company's payout ratio exceeds 100%.
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