Investors are skeptical about extreme dividends these days. A quick screen shows that 108 companies sport a yield of at least 10%. Of these, only 11 have beaten the S&P 500 benchmark over the last year. For every market-beating Whiting USA Trust I (NYSE: WHX ) or NorthStar Realty Finance (NYSE: NRF ) , there are 10 underperformers like Telefonica (NYSE: TEF ) and Niska Gas Storage (NYSE: NKA ) .
It's not like the market-beaters are far and away higher-quality businesses than the losers. The losers all have upsides, and the current winners are far from perfect.
Two of the stocks mentioned above score a perfect five out of five stars in our CAPS stock-grading system -- but it's not the outperformers you might have expected. Instead, it's multinational telecom Telefonica and natural-gas storage specialist Niska that have gained the absolute trust of our 180,000-plus CAPS participants.
Fellow Fool Travis Hoium keeps a wary eye on Niska's weakening business prospects but still calls the ultra-cheap stock "a good dividend play." Telefonica shareholders have seen their patience tested mighty hard as share prices plunged a heart-stopping 45% over the last 52 weeks. And Fool Matt Koppenheffer puts Telefonica among the least scary European stocks to buy right now. Tying it all together, Fool Jeremy Bowman believes that both of these stocks could double in the coming year.
On the other hand, the profit management vehicle of North American petroleum driller Whiting Petroleum (NYSE: WLL ) offers an inconsistent dividend yield at best, sports a rock-bottom one-star CAPS rating, and holds a "sell" rating from the only two analyst firms that even cover the stock. The Whiting Trust's best days may be behind it already.
The NorthStar Realty REIT fares better with a four-star CAPS rating. The firm's balance sheet is stronger than your average real-estate renter's, but the commercial mortgage market it operates in is still very shaky, and NorthStar has a crushing debt load to worry about. This 11.6% yield may be attractive, but it's hardly risk-free.
The moral of this story? No dividend is perfect, and I totally applaud investors for considering the risks in any high-yield stock.
When dividend yields soar, it's either due to remarkable payouts or collapsing share prices. In many cases, prices on high-yielding shares fall because investors worry about coming dividend cuts. Indeed, the Whiting Trust's payouts jump and drop like boot-camp recruits on an obstacle course, and Telefonica recently slashed its cash payouts by 31%.
So go ahead and consider the risks inherent in super-rich dividends. Fantastic payouts can be overwhelmed by falling market values, particularly if the collapse is followed -- or started -- by a dividend cut.
If extreme payouts leave you shaking your head over their risky nature, you should have a look at nine rock-solid dividend stocks that can secure your retirement. These yields may be a bit lower, but so are the market risks. This special report is free for a limited time, so get your copy right now.