Income investors generally want to maximize their dividend yield, but unfortunately, a winning investment strategy is not as simple as running a screener and buying shares of the stocks with the highest yields at a given moment. A dividend yield might reach high levels because the market is pricing the stock with the assumption that the dividend per share will decline in the future.
Investors analyzing high-yield stocks should assess the likelihood that the current dividend is sustainable using the dividend payout ratio, as well as several financial health ratios. Financial health metrics such as the interest coverage ratio, current ratio, and debt-to-equity ratio indicate a company's ability to sustain operations and distributions to shareholders through temporary disruptions such as recessions, pandemics, and energy crises. If dividends are too high relative to profits, and a company doesn't have enough liquid assets to keep paying the current dividend for several quarters, it's likely that the yield will fall back to earth.
With that in mind, here are 10 of the highest-yielding dividend stocks on U.S. exchanges in 2020 (based on Dec. 21 stock prices).
|Stock||Dividend Yield||Payout Ratio||Interest Coverage Ratio||Debt-to-Equity Ratio||
|S&P 500 Average||1.61%||36%||17.31||0.1||0.8|
|Shell Midstream (SHLX 0.87%)||18.04%||138%||7.03||na||4.46|
|Icahn Enterprises (IEP -1.84%)||15.6%||421%||(3.50)||2.52||2.67|
|Sunoco Properties (SUN 0.28%)||11.39%||207%||2.19||5.54||0.49|
|Chimera (CIM 1.73%)||15.17%||N/A||N/A||2.42||N/A|
|Starwood Properties (STWD -1.05%)||9.9%||N/A||N/A||2.76||N/A|
|Antero Midstream (AM 1.29%)||14.86%||184%||(2.40)||1.26||1.75|
|Lumen (LUMN -2.64%)||9.84%||84%||2.01||2.41||0.46|
|Energy Transfer LP (ET 0.45%)||15.74%||230%||1.36||2.87||0.69|
|MPLX LP (MPLX 2.11%)||12.16%||265%||(1.33)||1.51||0.71|
|Phillips 66 Partners (PSXP)||12.58%||90%||9.15||1.30||0.16|
Master Limited Partnerships
Many of the highest dividend yields available on stock exchanges are actually companies organized as master limited partnerships (MLPs). These companies avoid federal taxation at the corporate level by generating most of their revenues from specific activities related to the energy industry. MLPs are contractually obligated to distribute large percentages of their earnings to shareholders, which are called limited partners.
Several MLPs are among the highest dividend stocks right now for two main reasons. First, the required distribution of earnings naturally leads to high dividends. Second, their shares fluctuate in price on exchanges just like stocks, and the market has priced stocks across the entire energy sector at a discount following the rapid decline in oil prices earlier this year. Activity and revenue have dropped significantly among companies that produce, transport, service, and sell oil and gas products and services, threatening the stability of stocks across the sector. Ultimately, the sustainability of these dividends will rely on the timing of a recovery in oil prices.
Shell Midstream Partners is a spinoff from Shell that owns and operates midstream assets, such as pipelines, that transport oil and gas from the location of extraction to destinations such as refineries. It has an exceptionally high 18.04% trailing dividend yield after maintaining its quarterly distribution throughout 2020. A 138% dividend payout ratio is probably unsustainable, but Shell Midstream has enough liquidity to buy some time waiting for an oil price recovery.
Sunoco refines and sells petroleum and chemical products, and it operates a well-known auto fuel station brand. The company's per-share quarterly dividend has remained stable at $0.8255, an 11.1% yield. The payout ratio has consistently exceeded 100% for several years, which could be a warning sign. However, analysts are forecasting substantially higher profits in 2021, which should support dividends if Sunoco meets expectations.
Antero Midstream Partners owns and operates pipelines and other physical assets supporting natural gas extraction in Marcellus and Utica Shales. The company's steady $0.3075 per-share quarterly dividend is a 15% yield. The 183% payout ratio may be worrisome for some investors, but Antero Midstream has delivered growth in both revenue and adjusted earnings this year, with sufficient free cash flow to sustain its dividend in the short term.
Energy Transfer LP owns diversified midstream assets in all of the major U.S. production basins. The MLP's 15.3% trailing yield is deceptively high after it slashed the quarterly dividend from $0.305 to $0.1525 per share. Its forward yield is now only 8.7%. Energy Transfer will continue to struggle until the energy sector recovers.
MPLX was created by Marathon Petroleum in 2012 to manage its midstream transportation and logistics operations. The MLP actually increased its dividend at the start of the year and has maintained it to yield 12.16%. The 265% payout ratio is a concern for investors, but the forecasted revenue growth and return to profitability in 2021 would solidify this as a solid income play.
Phillips 66 Partners owns pipelines, terminals, and other transportation and storage assets. Shareholders are currently enjoying a healthy 12.58% yield from a dividend that has remained stable all year at a 90% payout ratio. Analysts are forecasting flat revenue and profits in 2021, so this could be an interesting income opportunity if the energy sector does not deteriorate further.
Icahn Enterprises is another MLP, though it holds subsidiaries in a diverse set of industries. The company has maintained a steady $2 quarterly distribution per share, which is currently a 15.6% yield at a 421% payout ratio. Performance is forecast to improve next year, which might bode well for a continued strong dividend, but the company is a long way from making the current dividend yield sustainable in the long term.
Real estate investment trusts
Real estate investment trusts (REITs) are similar to MLPs in that they avoid federal taxation on corporate earnings by distributing a large portion of their profits to shareholders. Many REITs are paying high dividend yields as the market casts doubt on their tenants' ability to support strong financial performance through the coronavirus economic crisis. The payout ratio is often less relevant for REITs, which incur large non-cash expenses, so investors evaluating a stock's performance favor metrics such as funds from operations (FFO) over earnings per share.
Chimera Investment is primarily engaged in the ownership of residential mortgages. Management dropped the quarterly dividend to $0.30 per share in the second quarter after it had held steady at $0.50 since 2016. Despite the fall, this is still a 14.3% forward yield, and the market is clearly signaling doubt that the REIT will comfortably navigate the situation that currently sees 13% of mortgages currently in forbearance or delinquent. A quick turnaround in employment and consumer sentiment could help solidify this income opportunity, but risks abound in the short term.
The Starwood Property Trust is a commercial and residential REIT with debt and equity investments. It has maintained a $0.48 per-share dividend through the year, paying a 9.9% yield. The REIT's diverse exposure could be encouraging for investors who anticipate a recovery in the real estate sector next year.
Lumen Technologies is a telecom provider previously known as CenturyLink, with customers in 60 different countries. The company is experiencing declining revenue for the second straight year, and analysts are forecasting a further contraction in 2021. Lumen is in the early stages of a pivot to focusing on a fiber network with a higher concentration in enterprise customers, which should align its financial results more closely with growth in digital transformation across the economy. The company has maintained a $1 per share dividend, which currently stands at a 9.8% yield and 84% payout ratio. Even if this yield drops, this still looks like an interesting opportunity for income investors.