With elevated inflation, income investments that can keep up with the pace of rising prices are crucial. By Ian Salisbury

Investors love dividends. But blue-chip companies that also boast impressive dividend yields -- think 5% or more -- have become an endangered species.

It isn't hard to see why investors might want to own dividend stocks. With inflation still elevated, income investments that can keep up with the pace of rising prices are crucial. Bonds, which have been underwater for much of the past five years, haven't been up to the job. Blue-chip stocks, with solid fundamentals and solid payout rates, used to fill this gap. But lately, they have gotten a lot harder to find.

A generation ago, in the 1980s, the average stock in the S&P 500 yielded 3% to 4%. By 2020, that average payout was around 1.5%. By June, it had shrunk to less than 1.25%, according to S&P Dow Jones Indices, lower than at any point since the tippy top of the 1990s dot-com bubble.

What gives? For years, dividends have been losing ground to stock buybacks, which corporate executives tend to favor because they are more tax efficient and because they boost earnings per share, often a big factor in bonus calculations.

Lately, however, the bull market has also played a role. Fast-rising stock prices mean higher price-to-earnings ratios; they also compress dividend yields. For the past year ended June 30, S&P 500 companies increased the amount they spent on dividends by more than 8%, but share prices rose by more than 13%.

The upshot: While it's still possible to find solid companies with attractive yields, the roster is shrinking -- and likely to shrink even further. To generate our list, we asked FactSet to help us screen for stocks with yields of at least 5%. While it's possible to find even higher payouts, they tend to signal danger. "Above the 5% mark, you're entering the twilight zone," says Julien Albertini, portfolio co-manager of the First Eagle Rising Dividend fund.

To further avoid the risk of dividend cuts, we looked for companies whose payouts amounted to no more than 75% of free cash flow and which Wall Street analysts expect to grow earnings at least 5% this year.

The screen yielded just four names -- down from nine when we ran a similar experiment earlier this year: Bristol Myers Squibb, Edison International, Prudential Financial, and Interpublic Group. Interpublic agreed to be acquired by rival advertising conglomerate Omnicom Group late last year, suggesting the list could soon shrink to three. Still, while none of these names are without warts, all four may be worth considering if yield is a prime concern.

Like other stocks on our list, Bristol Myers sports a yield that's so high -- 5.4% -- in part because its stock price has fallen so far. Shares have tumbled nearly 20% this year, as investors worry that its drug pipeline lacks potential replacements for aging hits like Eliquis and Opdivo. Investors got another disappointment last week, when the company cut its 2025 outlook for operating earnings, reflecting costs tied to a partnership with German company BioNTech, which is developing new cancer therapies.

Still, for investors willing to patiently pocket the dividend, Bristol Myers has a lot to offer. Sales of Cobenfy, which the Food and Drug Administration approved to treat schizophrenia in September, look promising. And with shares trading at just seven times forward earnings, Bristol Myers is at one of the cheapest valuations it has seen in decades.

Despite its travails, Bristol Myers is easily earning enough to support its dividend, with plenty left over to invest in new drugs, says John Buckingham, portfolio manager at Kovitz, which owns the stock.

Wall Street analysts expect Bristol Myers to earn $6.50 a share for 2025, handily covering $2.48 it spends on quarterly payouts. "We're not buying Bristol Myers because we expect the earnings to grow dramatically, " says Buckingham. "If I can get a 5.4% yield, I don't need a whole lot of capital appreciation to make the investment worthwhile."

Prudential, which Buckingham also owns, yields 5.2%. The insurance company's share price has languished, declining about 14% in 2025, as the company labors to shift its business mix away from risky variable annuities. Still, Wall Street analysts expect earnings per share to grow 9% this year, to $13.76. That should be plenty to cover the $5.40 cost of the dividend.

Edison International, the highest-yielding stock on the list, with a dividend yield of 6%, has been dogged by questions surrounding its role in January's Los Angeles wildfires. Still, analysts expect profits of $6.06 a share for 2025, compared with a $3.29 a share dividend. "Even if Edison faces modest fire costs and liabilities, we think it will be able to continue its streak of 21 consecutive annual dividend increases," wrote Morningstar analyst Travis Miller in a recent note.

One dividend investors may miss is Interpublic Group's. The stock yields 5.3%, but that is likely to drop somewhat later this year when the advertising giant is acquired by rival Omnicom.

The combination is designed to save about $750 million a year in costs, while giving the combined firm the heft it needs to compete in an ad landscape transformed by web properties like Google and Facebook and now under the looming threat of artificial intelligence.

As a result of the all-stock deal, Interpublic's shareholders will receive 0.344 shares of Omnicom for each Interpublic share they own, ending up with about 39% of the combined company. "The deal could yield cost savings and bring scale" to Omnicom, CFRA analyst Alex Fasciano, who maintains a Buy rating on Omnicom, wrote in an August note.

One piece of good news: When we expanded our stock screen to include solid companies with a yield of at least 4% rather than 5%, Omnicom, with a dividend yield of 4.1%, made the new list. Interpublic shareholders can still count on pocketing some substantial income.

Write to Ian Salisbury at ian.salisbury@barrons.com

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August 08, 2025 21:30 ET (01:30 GMT)

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