Yield Goal

The bull market’s recent hiccups--especially the Dow Jones industrials’ 247-point plunge of Aug. 15--no doubt have put many investors in a defensive mood. What to do if you’re feeling nervous?

One tactic: Buy stocks with high dividend yields and/or good prospects for dividend growth, so that even if share prices sink, you’ll still be earning some nifty yields that can help offset stock losses.

Admittedly, dividends have become an afterthought for many investors in the 1990s. The dividend yield on the average U.S. blue-chip stock, as measured by the Standard & Poor’s 500-stock index yield, currently is just 1.7%. That’s near its historical low, and it reflects the trend among companies to use their excess cash flow to buy back shares rather than pay out more to shareholders directly.

Still, “dividends not only enhance a portfolio’s return, they serve as a portfolio hedge during rocky market periods,” notes Charles Carlson, publisher of the Drip Investor ([219] 852-3220), a Hammond, Ind.-based newsletter that focuses on dividends and companies with dividend reinvestment plans, or Drips.

There are lots of ways to evaluate dividends, of course. But in searching through the database of Market Guide Inc., a stock research firm, two categories of high-yielding issues reveal stocks that investors might consider.

One category lists stocks that one would naturally expect to have lofty dividend payouts: publicly traded natural resources trusts (trusts that hold oil-producing properties, for example); limited partnerships; and real estate investment trusts, or REITs, which typically are structured to avoid most federal corporate taxes in exchange for passing along most of their property income to investors in the form of dividends.

The second category lists the highest-yielding stocks among the biggest U.S.-listed companies. Their dividend yields usually aren’t as high as, say, those of natural resources trusts, but the companies’ size and staying power could provide investors more peace of mind than shares of more obscure trusts or partnerships.

A universal caveat: Investors shouldn’t look at just the current yield on a stock (annual dividend divided by current stock price), but also the outlook for dividend growth. A dividend that is exceptionally high might be in danger of being cut.

Keep taxes in mind as well. Dividends are taxed as ordinary income, which means a top federal tax rate of nearly 40%. By contrast, long-term capital gains (on investments held more than 18 months) are taxed at a top rate of 20%.

That might seem a strike against dividends--unless your stock’s price is sinking and taking your capital gain with it.

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Where are Wall Street’s high dividend yields today?

Among trusts and limited partnerships, those invested in the energy and natural resources fields currently carry some of the top dividend yields.

Examples include BP Prudhoe Bay Royalty Trust, currently sporting a sizzling yield of 13% based on dividends paid over the last 12 months. The trust receives royalties from British Petroleum’s interest in Alaska’s Prudhoe Bay oil field.

Likewise, Sabine Royalty Trust holds royalty and mineral interests in oil and gas properties in the Southwest and Southeast. At a current price of $14.88 a share on the New York Stock Exchange, its yield is 11.2% based on dividends paid over the last 12 months.

But note: The trusts’ cash dividends (and yields) can fluctuate a good deal from month to month or quarter to quarter, reflecting changes in the trusts’ royalties and energy prices generally. Sabine, for example, paid a monthly dividend of 12.6 cents a share in January; August’s payment will be 15.1 cents, or 20% more.

Elsewhere in energy, Suburban Propane Partners, a limited partnership, is a retailer of propane gas for residential, business and farming customers in more than 40 states. Suburban’s yield is 10.6% based on dividends paid over the last 12 months.

But be careful there too: The price of propane has been under pressure. In Southern California markets, the price plunged more than 50% earlier this year, before rebounding somewhat lately. A prolonged downturn could hurt Suburban’s results and ultimately jeopardize its dividend payouts.

(Incidentally, some partnerships and REITs technically refer to their payouts as “distributions,” but, in effect, they’re the same as normal stock dividends.)

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For investors looking for yields that may be smaller but with big, stable companies behind them, Market Guide came up with some of the best dividend yields among major corporations.

Among companies with annual sales of $10 billion or more, the field includes the 5.7% yield sported by shares of RJR Nabisco Holdings, the tobacco and food products giant.

Drip Investor’s Carlson likewise favors RJR rival Philip Morris Cos. Its yield is only 3.6%, but the dividend grew 18% a year on average between 1991 and 1996.

(Of course, investors in tobacco shares face some risk that dividends could be cut or growth slowed, depending on the way smoking litigation is ultimately settled.)

Utilities also are on Market Guide’s dividend list, although their high dividends are not as secure as before because the industry is undergoing massive deregulation. To compete better in this new world, some utilities have slashed dividends to free up cash.

For now, however, electric utility Southern Co. is among the dividend leaders, with a 6% yield. So is PG&E; Corp., the San Francisco-based parent of Pacific Gas & Electric, now yielding 5.1%.

Another utility already in the throes of deregulation, telecommunications concern US West Communications Group, is also one of the top dividend payers among large companies, with a 5.8% yield.

Finally, some REITs carry above-average, if not spectacularly high, yields along with good prospects for price appreciation.

Analyst Steven Bloom of Morgan Stanley Dean Witter likes some REITs that invest in apartment buildings in California and the Northwest, where economic trends are keeping occupancy rates high. Among his picks: Bay Apartment Communities, with a current yield of 4.4%, and BRE Properties Inc., yielding 5.2% currently.

Times staff writer James F. Peltz can be reached at james.peltz@latimes.com

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Playing for Payout

Here are some high-dividend stocks investors might consider if they’re looking for a hedge against future sharp drops in the market overall:

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Stock Ticker symbol Mon. close Annual div. BP Prudhoe Bay Royalty BPT $17.19 $2.24* Sabine Royalty Trust SBR 14.88 1.66* Williams Coal Seam Gas WTU 18.50 2.03* Suburban Propane Partners SPH 18.81 2.00 Southern Co. SO 21.56 1.30 British Telecommunications BTY 67.81 4.02 US West Communications USW 36.63 2.14 RJR Nabisco Holdings RN 35.75 2.05 BRE Properties BRE 26.50 1.38 PG&E; Corp. PCG 23.50 1.20 Bay Apartment Commun. BYA 37.00 1.64 Philip Morris MO 44.94 1.60

Stock Div. yld. BP Prudhoe Bay Royalty 13.0% Sabine Royalty Trust 11.2 Williams Coal Seam Gas 11.0 Suburban Propane Partners 10.6 Southern Co. 6.0 British Telecommunications 5.9 US West Communications 5.8 RJR Nabisco Holdings 5.7 BRE Properties 5.2 PG&E; Corp. 5.1 Bay Apartment Commun. 4.4 Philip Morris 3.6

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* Based on most recent 12 months’ dividends paid; payouts can vary monthly or quarterly.

Note: All stocks trade on New York Stock Exchange.

Sources: Market Guide; Times research