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Dividend Stocks with Bond-like Yields

While some wonder if dividend investing is a fad, the strategy probably has staying power. Bonds yield little, and short-term rates are near zero, leaving individuals with few places to find yield. Demographics favor income investing; millions of baby boomers retire each year, and they want income to supplement Social Security and minimize the drawdown of retirement assets.

Opportunities are limited in the bond market, with Treasuries topping out at 3% and high-quality 30-year municipals at only 3.5% after a sharp rally in recent months. These yields are near the lows of the past 50 years.  Companies with high and sustainable dividends are often valued more like bonds than stocks, partly because 4% and 5% dividend yields often are higher than the rates on many corporate bonds.

A 4% dividend seems to resonate with investors who are willing to pay premium prices for companies with high yields. Some of the strongest S&P 500 industry groups last year — utilities, consumer staples and drugs — had some of the index’s highest yields.  During 2011, high-dividend payers were the top-performing group in the S&P 500, with the top 50 yielders at the start of 2011 — all with 4%-plus yields — returning more than 8% (not including dividends), compared with a flat showing for the entire index, according to Birinyi Associates.

The companies on the list below, including Merck (MRK), Pfizer (PFE), Waste Management (WM) and American Electric Power (AEP), have sustainable dividends and reasonable price/earnings ratios.

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