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10 Highest Dividend Yielding Stocks

By Brian Stoffel – Sep 9, 2016 at 7:28AM

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Not all high yields are worth chasing. Only three of these stocks pass the sniff test.

Image source: Getty Images.

It's no secret that dividend-yielding stocks are the cornerstones of a solid retirement portfolio. Usually, such stocks represent ownership in stalwart businesses that pay shareholders on a quarterly basis. Those payments not only offer downside protection, but they can also compound returns over time.

Still, one of the dangers of dividend investing is chasing after high yields. Case in point: The 10 stocks listed below have the highest yields of all the companies in the S&P 500, but not all of them are worth your investing dollars. In many cases, there's a good reason such stocks have high yields -- because there's a lot of risk involved.

Company

Dividend Yield

Frontier Communications (FTR)

9.2%

CenturyLink (LUMN 3.34%)

7.7%

Seagate Technology (STX)

7.4%

HCP, Inc. 

5.9%

Staples 

5.6%

ONEOK

5.1%

Iron Mountain 

5%

Ford (F 7.76%)

4.8%

General Motors

4.7%

AT&T 

4.7%

Data sources: Finviz.com, Yahoo! Finance.

If you're a dividend investor, there's nothing more important than free cash flow (FCF). This represents the amount of money a company was able to put in its pocket at the end of the year, minus capital expenditures. It is from FCF that dividends are paid, and investors should generally aim for companies that use less than 85% of their FCF to pay dividends.

Here's how the companies above stack up in FCF payouts.

There are sometimes reasonable explanations for a company having a high payout ratio. Frontier, for instance, has made some huge acquisitions that have yet to pay off fully, and its cash flow is far greater than its GAAP earnings. But we're in search of the best high-yielding stocks of the bunch, so we'll eliminate Frontier, Staples, ONEOK, and Iron Mountain right off the bat.

Business momentum

Beyond just paying a dividend, it's important to take note of whether or not the long-term thesis for investing in these companies is intact. Sometimes, a low payout ratio can hide a declining business that has strong FCF for the time being -- but is in long-term decline.

Ideally, we should see companies that are increasing revenue by at least 2% per year to outpace inflation, over a two-to-three-year time frame. Of the remaining companies, here's how they have performed in terms of revenue growth.

CenturyLink, a regional telecom, and Seagate, a provider of data storage devices, are both in long-term declines. The former is losing out to much larger national players while the latter is seeing its business be commoditized. General Motors, on the other hand, just hasn't shown the same type of growth that rival Ford has.

And then there were three...

That leaves us with three high-yielding dividends from the S&P 500 that are worth investigating.

For Ford, the main thing holding the stock back -- and the yield up so high -- is the fact that investors are worried we're on the brink of a downturn in car-buying behavior. This is a very cyclical industry, as everyone tends to upgrade to new cars at the same time -- when the economic winds are encouraging. That's been the case for a while now. If you're willing to wait out a downturn -- or you believe there's still room for revenue to grow globally -- then this may be a stock for you.

AT&T, on the other hand, benefits from huge market share in terms of mobile market share in America, as well as a smaller share in providing Internet services. The recent purchase of DirecTV also gives the company a hand in the content-delivery game. The barriers to entry are relatively high in the telecom industry, offering protection for investors. While the dividend is unlikely to grow by leaps and bounds, investors interested in a big payout would do well to investigate AT&T.

Finally, we have HCP, a real-estate investment trust (REIT) that focuses on healthcare properties. Obviously, with rising healthcare costs and a generation of Baby Boomers set to retire, there's a lot of potential growth for HCP. The company will be spinning off its post-acute care and skilled-nursing facilities portfolio in the near future, but the remaining company will still have lots of opportunity for growth.

Remember, not every high yield is worth chasing, but in the case of these three dividends, it might be worth buying shares for your retirement portfolio.

Brian Stoffel has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Ford and ONEOK. The Motley Fool recommends General Motors. 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.

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Stocks Mentioned

Ford Motor Company Stock Quote
Ford Motor Company
F
$12.36 (7.76%) $0.89
AT&T Inc. Stock Quote
AT&T Inc.
T
$16.09 (1.20%) $0.19
Staples, Inc. Stock Quote
Staples, Inc.
SPLS
Seagate Technology plc Stock Quote
Seagate Technology plc
STX
Frontier Communications Corporation Stock Quote
Frontier Communications Corporation
FTR
General Motors Company Stock Quote
General Motors Company
GM
$35.80 (8.91%) $2.93
Lumen Technologies Stock Quote
Lumen Technologies
LUMN
$8.04 (3.34%) $0.26
HCP, Inc. Stock Quote
HCP, Inc.
PEAK
$23.88 (0.51%) $0.12
ONEOK, Inc. Stock Quote
ONEOK, Inc.
OKE
$56.32 (5.17%) $2.77
Iron Mountain Incorporated Stock Quote
Iron Mountain Incorporated
IRM
$47.58 (4.25%) $1.94

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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