Take a wild guess what the highest-yielding Dow stock was at the end of 2007. Any guesses?
Citigroup (C) with a yield of 7.34%!
On December 31, 2007, Citigroup was trading at $29.44 and had paid out $2.16 in dividends during 2007, giving it a yield of 7.34%. Now, it’s important to note that Citigroup’s dividend may be slashed, which would also slash its yield. Although companies don’t like to cut their dividend payouts, there are times when they must do so in order to boost their capital.
Here’s a look at the ten highest-yielding stocks in the Dow Jones Industrial average at the end of 2007:
Although I’m not recommending it, a portfolio consisting of equal dollar amounts of each of the ten stocks in the list, could expect a portfolio yield of over 4%.
What’s all the talk about yields?
In case you aren’t familiar, a yield is simply the annual dividend divided by the current price of the stock. For those of you who like graphics, the formula looks like this:
It doesn’t get much simpler than that. This calculation gives us a way to compare dividend-paying stocks with other income-paying investments like bonds and money market accounts.
What does a high dividend yield tell us?
A high dividend yield tells us:
1. The company pays a large dividend, or…
2. The company’s stock price is depressed.
In other words, it can sometimes be an indication of value. Some people have used this strategy (mostly known as the Dogs of the Dow) to find and invest in beaten-down stocks. I think the strategy has merit but I also think people need to be careful because as I mentioned earlier, if a company is in really bad shape, management could decide to slash the dividend, which would lower your yield. So, it’s not without risks.
Personally, I think I would rather utilize more diversification by investing in several good exchange-traded funds index mutual funds and add fixed income exchange-traded funds if I need income (more on that later).
Oh, and in case you were wondering, here are the yields for all the stocks in the Dow Jones Industrial Average: