What is a Good Dividend? Lorillard (LO), Chevron (CVX), McDonalds (MCD), CenturyLink (CTL), Entergy (ETR)

Picking the highest dividend yield available in the market is a recipe for disaster. Here are some alternate ideas.

One of the questions which a dividend investor will often raise is "what is a good dividend yield?"
 
Logically a person who describes their investment strategy as being a "dividend investor" would go and pull out a list of the dividend paying stocks on the Dow or S&P 500 and simply sort by the highest yield.
 
If it was that easy, investors could have filled their boots with the likes of Pitney Bowes (PBI) (7% yield), Cincinatti Financial Corporation (CINF) (6%), Frontier Communications (FTR) (9%) and FirstEnergy Corporation (FE) (5.7%). While the yields on these stocks look good, one has only to look at the capital depreciation over five years and you begin to see that the dividend yield is not everything.
 
These stocks gave up 48%, 32%, 40% and 28% respectively over the five years showing that yield is not everything.
 
Perhaps a good proxy for US investors is to take a look at the Dow Jones Select Dividend Index Fund (DVY) which is an exchange traded fund (ETF) which tracks the price and dividend yield performance of stocks listed on the Dow Jones. At the moment this fund has an average distribution yield of 3.88% and its major holdings at the end of each quarter are public information.
 
If your personal dividend portfolio is delivering a lower yield than the DVY, then perhaps it is time to relook at the constituents of your portfolio and see if there are opportunities to re-tweak, considering that you can invest in the ETF for far lower costs.
 
A look at the top five stocks in the DVY portfolio may give dividend investors some clues as to where they can find yield for their personal portfolios:
 
Lorillard - 5% (LO)
CenturyLink Inc - 7.3% (CTL)
Entergy Corporation - 4.1% (ETR)
Chevron - 3.4% (CVX)
McDonalds Corporation - 2.9% (MCD)
 
While there is no hard and fast rule of what constitutes a "good" dividend, the above shows that benchmarking your average yield against the DVY will provide something of a benchmark for you if you are a dividend investor.
 
An interesting aspect to consider is that while the DVY is, in theory, giving investors access to good yields the return for simply buying the index is not necessarily there. Over a five year period, DVY has delivered -3.57% compared to the index which delivered -2.71%. This would indicate that a good dividend stock picker can outperform the index tracking "basket" if they pick smartly.

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