The Underlying Logic of Dividend Stocks

Some of the most popular equity plays among long-term investors are those that pay large dividends. In certain sectors businesses are structured to pay out a significant portion of their available cash to shareholders. It's no surprise that these usual suspects tend to remain on top of tickerspy's top-yielding Index rankings.

Yield, however, isn't the only factor in the equation. As was observed during the economic downturn, stocks with normally paltry dividends ended up boasting impressive yields merely because the share price got crushed. Meanwhile, others suspended their dividend payments to conserve cash. Still, there are a few sectors where investors can bet on consistently high dividend payments, and identifying them just takes a little reading between the lines.

Components of the MLPs Index pay an average 7.9% dividend – higher than any other sector. These largely energy-related master limited partnerships benefit from a structure that allows them to pay out the majority of cash flows to shareholders in lieu of company-level taxes.

For holders of Enterprise Products Partners (NYSE: EPD), Kinder Morgan Energy Partners (NYSE: KMP), and Plains All American Pipeline (NYSE: PAA), the MLP tax structure translates into dividend yields of over 7%.

The Tobacco and Tobacco Products Stocks Index is another place to find
high-yielding equity plays. The tobacco business is fairly straightforward, but these companies also have an interest in dishing out big dividends to shareholders – sitting on a mountain of cash makes easy pickings for lawyers and anti-smoking legislators.

Vector Group (NYSE: VGR), which markets tobacco products through subsidiaries Liggett Group and Vector Tobacco, pays its shareholders a whopping 10.9% dividend. Multi-billion dollar giants Phillip Morris (NYSE: PM) and Altria Group (NYSE: MO) pay 4.8% and 7.3% dividends respectively.

Perhaps the safest equity plays around aren't really equities at all. Bond ETFs trade like stocks, but perform like fixed income. A look at the sector's performance chart compared to the S&P 500 shows that the extremely low-volatility ETFs were largely immune to the economic downturn relative to traditional equities.

While traditional fixed income investors earn interest payments, bond ETFs distribute interest via dividends – the current average yield for the sector is 3.6%.

Whether managing an IRA, hedging against a downside risk, or just looking to add some dividend plays to a diversified portfolio, the sectors above some of the most consistent places to earn high yields.
For a full list of the highest yielding equity sectors and a suite of other performance metrics, visit tickerspy.com.

By Owen Vater, tickerspy.com