Hunting for Higher Dividends

NEW YORK (TheStreet) -- In a land of low interest rates, stocks with high dividend yields rule. For investors, the issue becomes how to select the ones that will be the most rewarding. High yield, high beta blue chips such as BHP Billiton (BHP), Caterpillar (CAT) and Dow Chemical (DOW) offer opportunities for investors to buy on the dips to maximize the long term total return.

Hunters often acquire a target by setting the crosshairs on a fixed position. The trigger is pulled when the target crosses it. This strategy is very efficient and very effective, as it obviates the need for roaming around and trying to find the target. The target comes to the hunter.

Dividend investors can similarly set a target by selecting a certain yield and then buying the desired stock when that yield is available.

Stocks that have high betas -- like BHP Billiton, Caterpillar and Dow Chemical -- fluctuate a great deal in price. (High beta stocks are more volatile than the market on average; low beta stocks move less than the market on average. The beta for the stock market as a whole is 1.) Dow Chemical has a beta of 2.67, well more than twice as volatile as the market on average. The beta for Caterpillar is 1.84. For BHP Billiton, the beta is 1.52.

Although the stock prices move around more than the market does, these aren't shaky companies. Caterpillar is a member of the Dow Jones Industrial Average. The market cap for Dow Chemical is nearly $50 billion, with annual sales of over $56 billion. BHP Billiton is the world's largest natural resources company.

Due to how solid these firms are, it results in each being ideal for buying on the dips when the share price is lower and the dividend yield is higher.

These companies are all able to pay dividends that have higher yields than the average of around 1.9% for a member of the S&P 500. The dividend yield for BHP Billiton is 3.61%. For Dow Chemical, it is right around 3%. Caterpillar pays a dividend of 2.67%. At the moment, all of these dividends are at least 30% more than the average for a member of the S&P 500.

And if investors buy when the share price falls, the yields become even more rewarding. For example, Dow is now trading around $42.70, with about a 3% dividend. If someone wanted to buy Dow when it was yielding 3.6%, or 20% higher than it is now and almost double the S&P average, the investor would put in a buy order at around $34. The 52-week low for Dow Chemical is $29.07, so that buy order would surely have been executed some time in the last year.

If investors buy when the stock price is depressed, it is likely that when the yield is paid, it will be based on a higher stock price.  Effectively, that increases the investor's yield on the original investment.

Plus, the dividend growth rate adds to the appeal of stocks bought using this technique. Over the past five years, BHP Billiton has had a dividend growth rate of 13.81%. For that period, the dividend growth rate for Caterpillar was 8.41%.

All investors should accept that it is impossible to time the market, no matter what the asset class. But if investors purchase stocks at lower prices, they will receive higher yields. Just use the dividend as a target for buying.

There are many blue chips like BHP Billiton, Caterpillar, and Dow Chemical that move around in price much more than the stock market as a whole. But these solid firms aren't a bad investment. Quite the opposite. Buying with a set yield as the target can result in a lower share price and a greater dividend that increases the long term total return.


At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Jonathan Yates has written for numerous publications including Newsweek and The Washington Post. He is a former general counsel for a publicly traded corporation. Much of his career was spent working on Capitol Hill for Members of Congress in both the House and Senate. He has degrees from Harvard University, Georgetown University Law Center and The Johns Hopkins University.

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