Cash Cows Are Cranking Up the Dividends

With the Great Recession slowly fading, companies are suddenly fat with cash. Non-financial companies in the Standard & Poor’s 500-stock index are sitting on a record $837 billion in cash as of April 1, up from $665 billion the previous year. As a result, about 135 companies in the S&P 500 have increased their dividends, or introduced new ones this year.

With stocks in an up-and-down trading pattern, many investment analysts say dividends can be a good way to lock in an attractive investment yield, especially when compared to the paltry interest rates being paid on traditional safe havens such as high-yielding savings accounts, CDs, and money market funds.

A listing of solid large-cap companies with dividend yields above 4 percent shows that many are in the pharmaceutical business: GlaxoSmithKline PLC (NYSE: GSK); AstraZeneca PLC (NYSE: AZN), Eli Lilly & Co. (NYSE: LLY), and Bristol-Myers Squibb Co. (NYSE: BMY) all are paying dividends in the 4.9% to 5.7% range. Other big companies on the list include AT&T Inc. (NYSE: T) and Unilever N.V. (NYSE: UN).

This free Morningstar.com stock screener finds companies with dividend yields of at least 3 percent that haven't cut their dividend in the past five years. (Click the “Morningstar Screens” button, and select “Solid High-Yield Stocks” from the drop-down menu.) The list doesn’t include distressed companies, which are least likely to maintain their dividend in the future. Among its healthcare picks: Abbot Laboratories (NYSE: ABT), Johnson & Johnson (NYSE: JNJ) and Meridian Bioscience Inc. (NASDAQ: VIVO).

Every silver lining comes with a cloud, however. Tax experts warn that the income tax on dividends is likely to be heading higher when the Bush tax cuts expire at the end of the year. Making the issue even iffier is that no one can predict how high tax rates will go. The current tax on dividends is capped at 15 percent, but that top rate may go as high as 39.6 percent next year, depending on what Congress chooses to do. Some market observers are even considering the possibility that some cash-rich companies may declare a special dividend before the end of the year to sidestep the higher tax.

Investment counselors caution that looking for the fattest dividend yields can be risky, since many companies can’t keep up that kind of payout and end up cutting the dividend or eliminating it. Look instead for solid companies that have a long history of paying out dividends.