NEW YORK ( TheStreet) -- Investors looking for stocks with solid dividend yields should spend time looking at some of the bigger pharmaceutical companies because it is not uncommon to find selections with payouts of more than 3%.
Although it is important to avoid focusing solely on the yields themselves, the market is still largely devoid of income-producing alternatives and will remain that way until yields in Treasury bonds see sustainable gains.
To capture the attractive dividends that can be found in the sector, investors need to avoid companies with shaky fundamentals and uncertain futures. It is all too easy to find examples of companies that have offered unsustainable dividend yields, and were forced to make sizable reductions later.
Dividend reductions can have drastic effects on stock values, so companies will generally wait to commit to increases in quarterly yield payouts until there is a good level of certainty that those payouts can continue to be made on a consistent basis. That is why younger companies with limited dividend histories are in a weaker position to make those commitments.
This is also why bigger (a higher dividend yield) is not always better. Ideally, we only want to invest in companies that exhibit stable cash flows and sustainable payout ratios, while offering attractive dividend yields for income investors at the same time. Here, we will test this idea by looking at two of the better-established companies in the pharmaceutical sector, and compare their dividend payouts with their fundamental outlooks.