With bond yields plunging because of worries about the global economy, investors might turn their attention to companies in the S&P 500 paying some juicy dividends.
The yield on the 10-year Treasury has been steadily falling all year and stood at 1.58% as of Wednesday. Meanwhile, the S&P 500 is offering a dividend yield of 2% overall, making the payout more lucrative than what the bond market has to offer.
Dividend yields are likely to keep increasing into 2020 as earnings growth picks up, according to Goldman Sachs. Stocks with the highest dividend yields are currently trading at their lowest relative valuation in nearly 40 years, the investment banks said.
“We forecast healthy continued dividend growth and believe the dividend swap market is pricing an overly pessimistic path for dividends, both in 2020 and cumulatively during the next 10 years,” Goldman Sachs said in a report to investors.
Some of the most well-known names in the S&P 500 are holding onto strong stock gains in an increasingly wobbly market while offering some of the highest dividend yields. Philip Morris has seen shares rise 24% in 2019 and its yield stands at 5.5%. Coca-Cola is up more than 13% for the year and offers a 3% dividend yield. As a bonus, both of those companies are part of the consumer staples sector, which tends to hold up relatively well during times of economic weakness.
There are dozens of other companies, including AT&T, Exxon Mobil and Ford that all offer dividend yields of more than 4%.
Companies were able to beef up their dividend payouts throughout 2018 as a lower corporate tax rate added more money to their coffers. The Trump tax law lowered corporate rates from 35% to 21% and companies took advantage by raising dividends and buying back stock. Apple was among the biggest companies to increase its dividend.
Investors might be concerned by the increased volatility they’ve seen in the stock market in August, driven largely by fears that the escalating trade war between the U.S. and China will crimp global economic growth. But, the S&P 500 is still up more than 14% for the year and the most recent round of earnings results from companies within the index weren’t as bad as expected. Profit during the quarter contracted less than 1% and analysts expect growth through the rest of 2019 and into 2020.
Despite the whims of the market and the potential for a downturn, companies aren’t likely to trim their dividends, which are viewed as key incentives for investors.