10 Highest Dividend-Yielding Stocks

Many investors are naturally drawn to stocks that offer up a high dividend yield. However, a high yield can often indicate that a company is in trouble. For that reason, income investors need to be very picky about which dividend stocks they choose to buy.

Image source: Getty Images.

With that in mind, here's a look at 10 of the highest-yielding stocks from the S&P 500. Let's put these companies to the test to determine if any of them could actually be worth owning today.

Data source: Finviz, as of Jan. 29, 2017. This list does not include REITs or limited partnerships, since they play by their own set of rules.

Test No. 1: Is the payout sustainable?

A must-know metric for any dividend stock is the payout ratio. To find this figure, we simply divide the company's annual dividend payment by its trailing twelve months earnings. Ideally, we want to see a number that is well below 90%.

Here's a look at the current payout ratio for each of these companies:

Data source: Yahoo! Finance.

Frontier Communications hasn't produced a profit over the past four quarters, which is why its payout ratio isn't available. That makes this a stock that we can immediately remove from contention.

CenturyLink, Mattel, and Seagate Technology boast payout ratios over 100%, which means their dividend payouts are higher than their net income. That makes them stocks to avoid as well.

Test No. 2: Is the business growing?

The six stocks left on our list all appear to have sustainable dividend payments, which is a great start. However, the best income stocks increase their payouts over time, so we have to consider these companies' growth prospects as well. 

For this test, I like to look at both a company's historical earnings growth rate and its projected profit growth rates over the next five years.

Here's what both of these figures look like for our remaining six stocks:

Data source: Finviz.

Both Entergy and FirstEnergy have shown negative earnings growth over the past five years, and Wall Street believes that this trend will continue for the foreseeable future. Thus, even though they offer up big dividend yields, I think investors would be best off avoiding these stocks.

Staples' historic growth rate is also a cause for concern. The company's profits have been shrinking by double digits each year because of relentless pressure from e-commerce companies such as Amazon.com. While Staples has a plan to reverse the trend, market watchers are only expecting meager profit growth from here. That makes this stock a pass in my book.

Ford is a bit of a head-scratcher. The company's stock is dirt cheap and its payout ratio is sustainable, but the markets are worried that we have hit peak auto sales in North America. If true, that could suggest that sales and profit are at their cyclical peak, so the company's stock may not appear to be as cheap as it looks. The other long-term threat is that ride-sharing services reduce the long-term demand for new auto sales, which would be a bitter pill to swallow. Those factors are probably why analysts are expecting minuscule profit growth from here, so I think investors would be better served to look elsewhere.

Two stocks to consider

With a sustainable dividend and high single-digit earnings growth potential, Kohl's is an interesting big-box retailer to consider right now. While the retail world is rapidly evolving, Kohl's is adapting by shuttering underperforming stores, lowering its costs, and using its huge cash flow to buyback shares. While sales growth will be anemic for the foreseeable future, if Kohl's can steadily march its bottom line higher, then its stock could grow into a winner from here.

Like Kohl's, Macy's stock is also down on its luck after the company reported weak holiday sales. In response, Macy's management team is getting aggressive by closing hundreds of stores, even some that are currently profitable. The company plans on using the proceeds to build out its website and mobile app to help it compete more effectively. In addition, the company plans to unload some of its valuable real estate assets to put the money to work for shareholders. When combined, the markets believe that these moves will allow the company's earnings to grow by more than 18% annually over the next five years. If true, that makes Macy's a stock that the markets may be overlooking.

So there you have it -- our initial list of 10 high-yield stocks has been whittled down to just two. While Kohl's and Macy's are far from risk-free, investors who are after a high yield should certainly give these two businesses a closer look.