The Market's Scariest Highest Dividends

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Are you interested in a security yielding 105%? Of course, you are! Who wouldn't be?

I know of another that's yielding 221%. So why settle for just 105%?

At 105%, you'll have your entire investment back in a year -- and in less than six months at 221%.

But if that sounds too good to be true, it is. Oh, those securities are real enough, but despite those eye-bulging yields, you're better off without 'em.

You wouldn't want to touch them with your neighbor's portfolio, because they're Greek bonds. The two-year yield flits around 105%, and the other is the one-year bond.

Those high yields are an object lesson: There's no such thing as a free lunch. But not all high yields are bad, so how do you find the good ones?

Danger! Danger!
A sky-high yield is one of the first warning signs that a stock or bond could be in real trouble. The market doesn't usually offer up megayields unless the security is judged to be extremely risky. In general, the higher the potential reward, the higher the risk.

And that's why you see Greek bonds that seem like they could pave your path to retirement.

But don't buy it, Fool.

A skyscraper yield could also occur because the market doesn't expect the payout to continue for long. That's the case with mortgage REITs such as Annaly Capital (NYSE: NLY  ) and Chimera (NYSE: CIM  ) .

They're paying double-digit yields, and they have done well by investors for the past few years, but that won't last forever. Mortgage REITs thrive in low-interest rate environments, so when the economy starts picking up and unemployment goes down, you can expect the payouts here to dry up. And that will cause their stock prices to swoon.

To be sure, a fat dividend is no guarantee that a stock is doomed, and some high yielders can turn into solid performers over time, as plenty of research indicates. So perhaps the best place to begin is to look for stocks the market's afraid of.

6 scary high dividends
To get a sense of that, I screened for stocks yielding more than 7%, trading on major U.S. exchanges, and having a market cap greater than $1 billion. I came up with just 97 hits. The list is filled with companies that should be trading for high yields: mortgage REITs (two of which you see below), energy-focused master limited partnerships, income trusts, and other stocks the market severely discounts.

Here are some of the notable names and why they're showing scary dividends.



Scary because...

Annaly 14.6% The high yield will last only as long as the bad times (unemployment, low interest rates)
Chimera 18.2% (See: Annaly)
Telefonica (NYSE: TEF  ) 10.9% More than half of revenue comes from Europe and more than a quarter from beleaguered Spain
Banco Santander (NYSE: STD  ) 10.3% More than half of assets are in Europe and a third in continental Europe.
Frontier Communications (NYSE: FTR  ) 12.8% It runs fixed-line telecom in a mobile world.
CVR Partners (NYSE: UAN  ) 9.5% It IPO'd in April, so little dividend track record. Its growth relies on capital markets. Major finance sites reported no dividend for a while.

 Source: S&P Capital IQ.

Another that didn't make the list because of market cap is Great Northern Iron Ore (NYSE: GNI  ) , which yields 11.6%. The yield is scary because it ends for sure in 2015, when the trust is dissolved.

To get a sense of the sustainability of dividends, it's useful to do a quick check of the following:

  • Net income payout ratio -- to determine what percentage of earnings are paid out as dividends; the free cash flow ratio is a good alternative, too.
  • Dividend growth rate -- you want to see this growing over time.
  • EPS growth rate -- to find a potential growing dividend, you'll want to see this climbing over time.

Here is how the above companies fared:


TTM Net Income Payout Ratio

5-Year Dividend Growth

5-Year EPS Growth

Annaly 184.6% 39.2% NM
Chimera 107.4% NM NM
Telefonica 71.6% 22.5% 14.2%
Banco Santander 26.1% (13.5%) 0.3%
Frontier Communications 466.5% (5.6%) (15.6%)
CVR Partners NM NM NM

Source: S&P's Capital IQ. TTM = trailing 12 months. NM = not meaningful due to lack of sufficient history (CVR and Chimera) or due to prior losses (Annaly).

These metrics give us some basis for evaluating the dividends, but often they don't tell the whole story. And sometimes they can be downright misleading, especially when dealing with non-traditional companies such as REITs, banks, and newly formed MLPs, such as above.

For example, we don't have historical measures due to CVR's limited life, and Frontier's free cash flow (from which it pays dividends) dwarfs its net income, so the 466% payout ratio is misleading. And net income is not an especially useful measure for Annaly and Chimera. For a more traditional business, such as Telefonica, these metrics can work well.

So a more qualitative approach can help flesh these numbers out.

For Annaly and Chimera, low interest rates and high unemployment won't last forever, but the Fed has promised low interest rates until mid-2013. So I have confidence in these players to continue generating the massive dividends. But when rates move up, these dividends will go down.

Telefonica does have huge exposure to Europe, but nearly 60% of its operating profit comes from fast-growing Latin America. Still, nearly a third comes from Spain. Given the regularity of telecom revenue, I'm more bullish on the long-term sustainability and growth of Telefonica.

Banco Santander is right in the crosshairs of the financial crisis, so while its payout is low, banking operations are somewhat of a black box. The Euro crisis is hitting fever pitch, too.

Frontier pays a hefty dividend, but it's had to cut it in recent years, and its cash-cow business -- fixed line telecom -- is facing serious headwinds from the move to mobile telephony. It's hard to see this business thriving in 15 or 20 years.

CVR doesn't put up any numbers in the table, but that's because it recently held its IPO in April. This partnership has a good opportunity in the quick-growing fertilizer business, and its high dividend is more typical for partnerships. Its irregular business could lead to irregular distributions, something income investors don't like much, a fact that could punish the stock.

As for Great Northern Iron Ore, the company will be dissolved in 2015. I don't want to bet that highly volatile ore prices will move in my favor before then.

Foolish bottom line
Because they're often high-risk propositions, the market's highest dividends aren't for everyone. That's why you should consider 11 names from a brand-new free report from Motley Fool's expert analysts called "Secure Your Future With 11 Rock-Solid Dividend Stocks." Today I invite you to download it at no cost to you. To get instant access to the names of these 11 high-yielders, simply click here -- it's free.

Jim Royal, Ph.D., owns shares Annaly and Frontier. The Motley Fool owns shares of Annaly, Telefonica, and Chimera Investment. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (17) | Recommend This Article (41)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 09, 2011, at 5:34 PM, ntdayton wrote:

    You didn't mention American Capital Agency (AGNC)because...?

  • Report this Comment On November 09, 2011, at 5:50 PM, TMFRoyal wrote:

    Hi, ntdayton,

    I could have totally mentioned AGNC, but instead chose NLY and CIM as representative of the mortgage REIT space. But it would certainly be fair to put it in. Instead, I wanted a broader selection of companies from different industries.

    Foolish best!


  • Report this Comment On November 09, 2011, at 5:53 PM, Tsharp1947 wrote:

    How good are your numbers? I've read several sources on these blogs that tell me TEF gets as much money from South America as it does Europe, and just last week read where only 41% of their business is in Europe.

  • Report this Comment On November 09, 2011, at 6:03 PM, xetn wrote:

    It seems that the EU central bank, IMF and the emerging ESM framework are all working to guarantee Greek, and the rest of the PIIGS debt til hell freezes over or everyone defaults. If this is truly the case, then why not invest in the Greek debt?

    Just asking.

  • Report this Comment On November 09, 2011, at 6:15 PM, joemas wrote:

    Not sure why but FOOLS keep on taking shots at NLY. IF you are DRIPing this stock you do not care so much about will it cut its dividend it is a REIT for heaven sake. Buy on a pull back and it could double in less than 6 years.

    Its low in 2008 was $12.40 and we all know what happen in Oct 2008. Its high in 2007 was $21 and we know about mortgages in 2007. BUT if you were smart enough to buy 100 shares for $1250 in 2008 when everyone else was "fearful" You would have collected over $800 in Dividends and if you DRIPPED you would own nearly 180 shares. Put it in a ROTH and let it go I think it will be higher and lower than it is now but do not watch it like it is going to ZERO. It is not....

    2008-10-17 $12.4 and a dividend of $0.55 for the quarter.

    You can be a FOOL and do the research or you can be a fool and buy the MO that everyone recommends and watch your dividend go up in smoke....

    Dividend Payment History for Annaly Capital Management Inc (NLY):

    Ex-Dividend Date Dividend Amount

    Sep 28, 2011 $0.600000

    Jun 28, 2011 $0.650000

    Mar 29, 2011 $0.620000

    Dec 23, 2010 $0.640000

    Sep 30, 2010 $0.680000

    Jun 25, 2010 $0.680000

    Mar 30, 2010 $0.650000

    Dec 24, 2009 $0.750000

    Sep 29, 2009 $0.690000

    Jun 25, 2009 $0.600000

    Mar 26, 2009 $0.500000

    Dec 26, 2008 $0.500000

    Sep 16, 2008 $0.550000

    Jun 25, 2008 $0.550000

    Mar 26, 2008 $0.480000

    Dec 27, 2007 $0.340000

    Sep 27, 2007 $0.260000

    Jun 28, 2007 $0.240000

    Mar 29, 2007 $0.200000

    Dec 27, 2006 $0.190000

    Sep 27, 2006 $0.140000

    Jun 28, 2006 $0.130000

    Mar 29, 2006 $0.110000

    Dec 28, 2005 $0.100000

    Sep 26, 2005 $0.130000

    Jun 28, 2005 $0.360000

    Mar 30, 2005 $0.450000

    Dec 29, 2004 $0.500000

    Sep 28, 2004 $0.500000

    Jun 30, 2004 $0.480000

    Mar 29, 2004 $0.500000

    Dec 24, 2003 $0.470000

    Oct 1, 2003 $0.280000

    Jun 30, 2003 $0.600000

    Mar 27, 2003 $0.600000

    Dec 27, 2002 $0.680000

    Oct 1, 2002 $0.680000

    Jul 1, 2002 $0.680000

    Apr 3, 2002 $0.630000

    Dec 27, 2001 $0.600000

    Oct 3, 2001 $0.450000

    Jul 2, 2001 $0.400000

    Apr 3, 2001 $0.300000

    Dec 27, 2000 $0.250000

    Oct 5, 2000 $0.250000

    Jun 29, 2000 $0.300000

    Apr 3, 2000 $0.350000

    Dec 29, 1999 $0.350000

    Oct 7, 1999 $0.350000

    Jul 7, 1999 $0.350000

    Mar 30, 1999 $0.330000

    Dec 29, 1998 $0.305000

    Oct 1, 1998 $0.270000

    Jul 1, 1998 $0.320000

    Mar 27, 1998 $0.320000

    Dec 29, 1997 $0.220000

  • Report this Comment On November 09, 2011, at 6:20 PM, TMFRoyal wrote:

    Hi, Tsharp1947,

    The numbers have been triple-checked and they come from our data provider CAP IQ. It may just be a definition problem. What do you mean by "gets as much money"? Latin America is far and away more profitable for TEF than Europe ex-Spain. And as I mention above, Spain does about a third of TEF's operating profit. If you mean revenue, then the numbers are much different. But I'm encouraged by the massive profitability in Latin America.

    Foolish Best,


  • Report this Comment On November 09, 2011, at 6:24 PM, TMFRoyal wrote:

    Hi, joemas,

    I wouldn't call this a "shot at NLY" at all. I own the stock, too, after all. And I see plenty of good tailwinds for the company for at least the next two years, as I've mentioned elsewhere.

    But as even your dividend history shows, the dividend will go down, and the stock price will follow. But that won't likely happen until interest rates rise.

    Foolish best,


  • Report this Comment On November 09, 2011, at 8:52 PM, NovaB wrote:

    I have done quite well owning Annaly for 10 years. It is the only stock I have kept over that time.

    As for unemployment going down and the economy going up? Ain't gonna happen any time soon. Between the collapse of the Eurozone and the bi-partisan impasse in Congress their isn't one single reason to be optimistic in the next four years at the very least.

  • Report this Comment On November 09, 2011, at 9:37 PM, TMFRoyal wrote:

    Hi, NovaB,

    I have to say, it's hard to disagree with you. There aren't a lot of reasons to be optimistic (unless you own mortgage REITS -- ha!)


  • Report this Comment On November 09, 2011, at 9:57 PM, techy46 wrote:

    "A skyscraper yield could also occur because the market doesn't expect the payout to continue for long. That's the case with mortgage REITs such as Annaly Capital and Chimera.For Annaly and Chimera, low interest rates and high unemployment won't last forever, but the Fed has promised low interest rates until mid-2013. So I have confidence in these players to continue generating the massive dividends. But when rates move up, these dividends will go down/"

    Very contradictory article which doesn't bother to describe the REIT business model which has nothing to do with what the market expects. REITs earnings are based in the spread between short and long term rates leveraged by an x factor and they must pay out 90% of earnings. NLY has been performing very well as an REIT for quite a while and fully knows the impact of rate curve changes.

  • Report this Comment On November 10, 2011, at 11:24 AM, TMFRoyal wrote:

    hi, techy46,

    NLY's yield is determined by the market. If investors bid up shares, the yield would go down. So investors are handicapping the stock, offering a 14% or so yield. If that payout could last forever, investors would bid up the stock so that the yield was not so attractive.

    As I said, I own NLY and I think it's an attractive place to be now.


  • Report this Comment On November 10, 2011, at 11:48 AM, Regarded49 wrote:

    This article has not taken anything into account that the Fed has already given to the world of mREITS. Nearly zero short term rates for at least 2 years. I agree that there are risks, but NLY has taken a less agressive approach to leveraging, and has done well for a very long time.

    As an investor, i would feel pretty darn smart by holding NLY for at least the next 2 years at least.


  • Report this Comment On November 10, 2011, at 11:56 AM, epeon wrote:

    So, if NLY is a bet on low interest rates, bad economy, and high employment than it is really a bet on Obama. If you believe Obama is being re-elected than buy this stock.

  • Report this Comment On November 10, 2011, at 12:59 PM, foolishbk wrote:

    So, we want to bail on the REIT's about next October for a month or so to see how the election goes?

  • Report this Comment On November 10, 2011, at 2:15 PM, dnadoc wrote:


    There are many, many of us who respectfully disagree with you.

  • Report this Comment On November 10, 2011, at 4:14 PM, trestranpryat wrote:

    epeon is exactly right. There are too many voters out there who think the rich have somehow stolen something from them, and the magic moron is the man for the job to get it back for them. And they are also entitled to some of what the rich have earned. That means 4 more years of ~9% unemployment, and thus, 4 more years of zero % interest rates. I'm plowing most of my ROTH IRA money into these high-yield REITS, and the tax-free cash keeps rollin in big-time.

  • Report this Comment On November 13, 2011, at 11:30 AM, mrmcook wrote:

    I like NLY and AGNC also and have owned both for the dividends, but I especially like ARR reit as they pay around 19%, but they pay monthly dividends so you have a little more room to trade in and out depending on market outlook. I feel that makes them a little more liquid in a way. I mean if there is any reason to expect a move up in interest rates you can quickly get out without loosing a quarter of a years dividends.

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