These dividend stocks yield as much as 11% while meeting strict criteria for estimated cash flow

There are different ways to consider dividends when selecting individual stocks. A long-term growth investor might not be concerned about a high current yield. This investor may not be looking for current income, but may like the idea of a steady increase in dividends over time. A look back at which companies have been the best compounders of dividend payouts over the long term can be useful. We did this late in June with a screen of the S&P 500 Dividend Aristocrats — a group of companies in the benchmark index that have raised their regular dividend payouts for at least 25 consecutive years.

But today we’re focusing on current income, which means dividend stocks with high yields, and we’re looking ahead to see how well the dividends may be covered by companies’ cash flow through 2025.

If you are shying away from mutual funds or exchange-traded funds while looking to invest in individual dividend stocks for income, it might be best for you to hold many of them in various industries to reduce risk. Or maybe you can have a portion of your income-generating portfolio in funds and some in individual stocks. The individual stocks should be a diversified group of companies, because even seasoned stock pickers will wind up with some clunkers. And as we saw with banks earlier this year, what affects a few troubled institutions can send share prices plunging for most of an industry group.

A dividend screen for payout headroom

Here’s how we screened stocks for high current yields with a degree of safety from dividend cuts.

We began with the S&P 1500 Composite Index, which is made up of the S&P 500, the S&P Mid Cap 400 Index
MID
and the S&P Small Cap 600 Index
SML.
There are various broad indexes out there, but S&P Global provides its own quality screen when adding a company to the S&P Small Cap 600. The criteria for initial inclusion include positive earnings for the most recent quarter and for the sum of the most recent four quarters. Of course a company within the S&P indexes may not always be profitable thereafter.

Among the S&P 1500, there were 121 stocks with dividend yields of at least 5.00% as of the close on Aug. 7, according to data provided by FactSet.

For our first cut, we limited the list to companies that are each covered by at least five analysts polled by FactSet. This reduced the list to 95 companies.

The screen is an attempt to limit the risk of dividend cuts by identifying companies expected to generate cash flow well in excess of their dividend payouts.

The main focus was free-cash flow. A company’s free-cash flow (FCF) is its remaining cash flow after capital expenditures. It is money that can be used to pay dividends, buy back shares, expand or for other corporate purposes that will hopefully benefit shareholders.

If we divide a company’s expected FCF per share for a 12-month period by its current share price, we have an estimated FCF yield. This can be compared with the dividend yield to see whether or not there is “headroom” to increase the dividend. The more the headroom, the less likely it may be that a company will be forced to lower its payout.

For most companies in the financial sector, especially banks and insurers, FCF information isn’t available. But in these heavily regulated industries, earnings per share can be a useful substitute to make similar headroom estimates. We also used EPS for real-estate investment trusts that engage mainly in mortgage lending.

For REITs that own property and rent it out (known as equity REITs), we can make similar use of funds from operations (FFO), a non-GAAP figure commonly used to gauge dividend-paying ability in the REIT industry. FFO adds depreciation and amortization back to earnings, while netting-out gains on the sale of property. This can be taken further with adjusted funds from operations (AFFO), which subtracts the estimated cost to maintain properties the REITs own and rent out.

Among our 95 companies, the appropriate consensus estimates for FCF, EPS or AFFO were available for 78 companies through calendar 2025. We used calendar-year estimates for a uniform screen because some companies have fiscal years that don’t match the calendar.

In the following table, the “FCF yield” columns are based on the appropriate calculation method used for each company (FCF, EPS or AFFO), as indicated.

The 78 companies were tested to see if their FCF yields (again, based on estimated FCF, EPS or AFFO as appropriate) exceeded their current dividend yields for all three years. For 2023, 21 weren’t expected to cover their dividend payouts. The remaining 57 companies were expected to cover the payouts for all three years.

Narrowing further, here are the 28 dividend stocks, sorted by yield, of companies showing estimated headroom of at least 2% for 2023, 2024 and 2025:

Click on the tickers for more about each bank.

Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

Before investing in any individual stock, you should do your own research to form your own opinion of a company’s long-term viability.

For example, office real estate is a concern for REITs concentrated within the space, and for some banks. But within banking, exposure to commercial restate may be quite limited for a bank if loan-to-value ratios are factored in, and the timing of loan maturities and what may be a long recovery for the sector may also be factored in.

For the banks, the dividend yields are as of the close on Aug. 7, which means yields may have moved a bit higher in the wake of credit rating downgrades and reviews for possible downgrades of banks by Moody’s.

Another concern for the banks is that federal regulators’ proposed new capital rules may limit dividend increases or even force banks to cut payouts as they build up capital. But under the proposed rules, the banks have a long runway, with “a generous timeline starting in July 2025 and with a three-year phase-in,” according to Oppenheimer analyst Chris Kotowski. There may be plenty of time for the banks to adjust to the new environment without taking drastic measures.

The high free-cash-flow yields (or EPS or AFFO yields) on this list may point to opportunities for well-supported dividends for years. But only your own research can provide enough information for a long-term investment.

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