Dividends matter in a big way but only if they can be counted on. Historically, common stocks typically yielded 2% to 3% and anything above that was considered abnormal and unreliable. After all, dividends were supposed to complement the capital gain from the common stock but only if they were dependable, recurring and growing. By some estimates, dividends have been responsible for the approximately half of the long-term overall return of common stocks.
But occasionally the market has it wrong or an opportunity arises where incredible dividend yields can be had. I should note that, more often than not, Mr. Market is right: When you see a dividend that is too good to be true, it often is.
That being said, there are some pretty attractive dividend yields out there now. And that's not only because we are living in a zero-interest world, although low interest rates certainly magnify the dividend yield; a 3% yield looks far more sexy when banks pay nothing.
Seagate Technology (STX) is a name I missed when the opportunity was juicy, but the opportunity is still enticing. A couple of months ago the stock traded for $20, and the dividend yield was in excess of 10%, clearly a sign that the market viewed the dividend as unsustainable. The reality was that the stock was dirt cheap. Still, at $33 per share, the yield of 7% is as good as it gets. ValueAct Capital Partners, a highly regarded investment firm, just took a stake in the company for added comfort. But even if STX cuts the dividend by half, 3.5% is nothing to sneeze at.
For those who want something more boring, nothing beats Tupperware Brands (TUP) and its 4.3% yield. I don't see many companies wanting to get into the kitchen container business, and Tupperware is one of those rare companies whose name is used to describe all containers, just as the word "Google" is used as a verb to describe internet search.
Thanks to some recent bad publicity, Wells Fargo (WFC) shares now trade for 12 times earnings and yield 3.2%. Conservative investors looking for a high-quality blue-chip investment with great income and stable growth can't do much better than Wells Fargo (a holding in Jim Cramer's Action Alerts PLUS portfolio). And if the fallout from the fake account scandal harms the shares more, you should get more excited.
Whether the Fed raises rates or not, interest rates are going to stay low for quite some time by historical standards. So the value of above-average quality dividend yields is likely going to not only lead to income generation but decent stock price appreciation as well.