THE TIMES 100: THE BEST COMPANIES IN CALIFORNIA : VIEW FROM THE STREET : DIVIDENDS : Hefty Yield on Some Issues Belies Underlying Risk

The Times’ ranking of 15 California companies with the highest dividend yields--annual dividends as a percentage of price per share--include firms that may be just right for conservative, income-oriented investors.

The list, as would be expected, includes a large contingent of utilities, which typically pay high dividends. It also includes a handful of financial services concerns. (However, it excludes master limited partnerships and real estate investment trusts, because their dividends often include a return of investors’ capital.)

Many of these stocks, particularly the utilities, should appeal to retirees or others who need constant dividend income and are wary of stock market volatility. Their high dividend payments will offset at least part of any losses from falls in their share prices.

And utility stocks, as a group, have been much more stable than other issues in recent months, not falling as much as other stocks in the October crash but also not gaining as much in this year’s market rally.

But investors shouldn’t rush to buy these or other high-yield stocks until they’ve looked at their dividends more closely.

Stocks with yields greater than competitive money market rates--now in the 6% to 10% range--are likely to carry more risk or question marks, investment experts say. That explains the high 12.19% yield at Pacific Gas & Electric, which ranks first on the list.

Concern that PG&E; may cut its dividend has helped drive down its stock price, raising its yield, says Geraldine Weiss, editor of Investment Quality Trends, a La Jolla newsletter that tracks high-yielding stocks. Utilities typically are extremely reluctant to cut their dividends, but PG&E;’s current annual dividend of $1.92 per share exceeds its 1987 earnings of $1.53 per share. Retention of that dividend level may hinge in part on regulatory rulings concerning PG&E;’s Diablo Canyon nuclear plant.

Also, some companies--particularly some banks--make the list not just because their dividends are high, but because their stock prices are depressed.

And stocks with the highest yields may not necessarily be the best investments over the long run. While the dividends may appeal to those seeking income, a number of studies have shown that stocks with high yields often are outperformed in the long run by stocks with low yields, even after dividends are reinvested. Those low-yield equities overcome low dividends with higher gains in stock prices.

“Too often investors are seduced by a high yield, and don’t look beyond yield to the underlying investment,” says Sarah A. Stack, associate director of research for the Los Angeles brokerage of Bateman Eichler, Hill Richards.

Newsletter editor Weiss suggests that investors compare each company’s yield to yields of competitors. Also, investors should look at the historical price performance of companies to determine at what yields their stocks were considered undervalued or overvalued.

Stocks in The Times’ listing that Weiss now considers undervalued include PG&E; (current yield 12.19%, undervalued at a yield of 7.7% or higher) and Security Pacific (current yield 6.05%, undervalued at 4.7% or higher).

Stocks close to being undervalued, Weiss says, include San Diego Gas & Electric (current yield 8.25%, undervalued at 8.6% or higher), First Interstate Bancorp (current yield 6.71%, undervalued at 7% or higher) and Pacific Enterprises (current yield 7.65%, undervalued at 8% or higher).

Real estate investment trusts, by virtue of their legal requirement to pay 95% of taxable income to shareholders, generally offer high yields. Some California REITs with the highest yields, excluding return of capital, are Lincoln Realty (13.46% yield), Countrywide Mortgage Investment (13.24%), Medical Properties (10.67%) and Beverly Investment Properties (10.06%).

DIVVYING IT UP Ranks companies by dividend as percent of stock price.

Cash dividend Stock price Rank Company yield 4/4/88 1 Pacific Gas & Electric 12.19 15.75 2 Occidental Petroleum 9.71 25.75 3 San Diego Gas & Electric 8.25 31.50 4 Southern Calif. Edison Co. 7.84 30.38 5 Pacific Enterprises 7.65 45.50 6 Southern Calif. Water Co. 7.15 28.25 7 First Interstate Bancorp 6.71 41.75 8 CP National 6.40 26.25 9 Pacific Telesis Group 6.37 27.63 10 Security Pacific 6.05 29.75 11 SJW Corp. 5.92 29.75 12 H.F. Ahmanson & Co. 5.87 15.00 13 Transamerica Corp. 5.62 32.75 14 CalFed 5.60 25.00 15 Dominguez Water Corp. 5.55 15.50