Investment Income: How To Find The Best Dividend Stocks

Investment Income: How To Find The Best Dividend Stocks

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If you’re hunting for decent income from securities in this still-low interest rate environment — or you plan to seek good investment income once you retire — here’s an approach that can identify stocks that have performed well recently and are paying decent dividend yield. Their yields are good but not sky high like yields from distressed stocks tend to be. Where can you find such stocks?


They are in the portfolios of currently successful dividend-oriented mutual funds.

Start by looking for dividend funds with the highest total returns over the past 12 months. You can do that with screening tools offered by large financial firms at websites like

Then narrow the field. Keep only those funds with $100 million or more in total assets. That way, you eliminate outliers that may temporarily be among the overall top performers, but whose investment approach is unproven (i.e. it hasn’t been around long enough to amass $100 million). Worse, their investment approach may allow them to take risky steps that prevent them from growing assets.

Next, eliminate funds whose own overall yield is less than the S&P 500’s, which currently is 1.81%. Otherwise, you might as well simply invest in an S&P 500 ETF or mutual fund and save yourself the time it takes to hunt for something better. Also, a 1.81% yield is no great shakes.

Investment Income Tools

After taking those steps, your investment income list includes only top-performing funds with stronger-than-average yields. You may want to use more than one online screening tool. It may help if you copy your results to a spreadsheet that lets you rank funds by name, returns or yield.

Your following step is to comb through holdings of the remaining funds. At least start your hunt with just top holdings. That way, you’re looking at stocks that dividend-oriented professional money managers like the most.

Constructing a search screen with those criteria, here are key traits of the 10 mutual funds with the best one-year returns that boast the highest yields. Their total returns range from 9.28% up to 18.96%. The S&P 500 was up 16.49%, better than all but two of them.

The funds’ yields range from 1.84% to 3.44%. Three of them offer yields higher than 3%. Seven have yields above 2%.

You end up looking for stocks in funds that have mostly lagged the big-cap bogey in total return but have outperformed in yield.

What do these standout dividend funds’ top-holding stocks look like?

Cherry picking top performing, top yield stocks, your assortment includes China Petroleum & Chemical (SNP). It’s held by $345 million Matthews China Dividend Fund (MCDFX).

The China-based energy and chemical company is up about 32% this year and has a dividend yield of 8.3%. The S&P 500 is up about 6%.

Another stock highlighted by this approach is Cisco Systems (CSCO). It’s held by $155 million Voya US High Dividend Low Volatility (VHDIX).

The networking hardware and telecommunications gear giant is up about 13% this year and has a dividend yield of 3.1%.

Two Investment Income Approaches

For clients seeking investment income, Haverford Trust focuses on dividend-paying stocks. One of its strategies, similar to the approach outlined above in this report, seeks large caps whose dividend yield is higher than the S&P 500’s average.

Haverford’s second option focuses on companies whose dividends are growing.

“We offer two strategies because some people prefer owning higher-yielding stocks,” said Hank Smith, Haverford’s co-chief investment officer. “For people looking more for total return, we put them into the quality growth strategy.”

Individual investors can fine tune their own search for investment income. At the outset, look for funds with the word “rising” in their name as well as “dividend” or “dividends.”

Smith cautions investors to beware of stocks that are viewed by most investors as bond proxies. In a rising rate environment like the present, their values can get clobbered.

And if total return is a higher priority than income for you, be wary of relying too much on dividend stocks.

“Over the past five years, dividend payers in the S&P 500 averaged a 12% annual total return,” Smith said. “Non-dividend payers averaged 18%.”

But, he adds, a lot of that disparity is attributable to just four stocks, the FANG stocks: Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google parent Alphabet (GOOGL).

“It is unrealistic to expect the FANG stocks to have the same return over the next five years,” Smith said. “That’s why I expect a reversion to the longtime norm, in which large-cap dividend payers outperform.”

That would make it safer to invest in dividend-paying stocks for the sake of income as well as total return, he says.

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