In uncertain economic times like today, investing in short-term Treasury bills and making 4% to 5% on your money with practically no risk sounds pretty good. Now, imagine if you could up that return by putting your money into some safe dividend stocks that yield even more.
Dividend stocks are a great way to generate passive income, and there's nothing more satisfying than sitting back and watching it pour into your bank account each quarter.
That said, dividend investing is harder than it looks, and investors need to make sure that companies can sustain their dividends and don't need to cut them. Here are two ultra-high-yielding dividend stocks to buy hand over fist and one to avoid.
New York Community Bancorp: 7.9% yield
Large multifamily lender New York Community Bancorp (NYCB 1.92%) recently purchased certain assets and liabilities from Signature Bank, which was taken into receivership by the Federal Deposit Insurance Corporation earlier this month after experiencing a significant deposit run. The deal is transformational.
Prior to the move, NYCB had a loan-to-deposit ratio of 118%, which forced it to bring higher-cost borrowings onto its balance sheet. Running largely on an old thrift model that relies on higher-cost funding and fixed-rate loans, NYCB usually sees its margin and profits struggle in a rising interest rate environment. But the deal for Signature includes $25 billion of cash that NYCB can now use to pay off these higher-cost borrowings.
The deal will lower NYCB's loan-to-deposit ratio to 88% and dramatically improve earnings. It also makes meaningful progress on NYCB's goal to transform from a thrift model into more of a modern commercial bank with lower-cost deposits and more diverse lending verticals.
With a quarterly dividend of $0.17, Q4 earnings per share of $0.30, and continued pressure on earnings, I think some had worried about whether a dividend cut might be coming. But the renewed earnings power should alleviate this pressure. Additionally, even if there were a cut, it would likely be very minimal because the dividend is part of what makes the stock attractive. NYCB's overall future looks much better with this deal, so I now view the stock to be a good investment opportunity as well.
KeyCorp: 7.1% yield
KeyCorp's (KEY 0.55%) current high-yield dividend may not last long -- and no, it's not because the bank can't cover it but because it has been sold off significantly with the rest of the banking sector after several banks collapsed earlier this month.
The good news is I think KeyCorp is in very solid shape. It does not have a lot of unrealized bond losses that haven't already been accounted for in its equity. This is what led to fears that ultimately took Silicon Valley Bank (a subsidiary of SVB Financial) down.
Being more of a traditional regional bank, KeyCorp also has a much more diverse deposit base composed of consumers and also businesses in a variety of industries and different states.
Prior to all of this banking turmoil, KeyCorp's deposit costs had been at the lower end of its peer group and its own projections, and its deposit costs projections for the year had been lower than any of its peers. The banking sector may stay volatile for a while, but I see KeyCorp as much better insulated from the type of threats that took SVB down, and the risk-reward trade-off is compelling on a long-term basis.
Avoid Office Properties Income Trust: 20% yield
Real estate investment trusts (REITs) are known for paying healthy dividends because in order to qualify for the special tax advantages that make them a REIT, they must pay out at least 90% of their taxable income in dividends. But a cardinal rule in dividend investing is to be wary of yields that look too good to be true.
Office Properties Income Trust (OPI -2.46%) owns and leases office properties across the country, mainly to investment-grade single tenants. At the end of 2022, the company had 160 properties under its umbrella in 30 different states, as well as Washington, D.C. But as many are keenly aware, office use has been disrupted by the pandemic, which has spurred many people to work from home at least part of the time, and this does not look to be a trend that's going away. This could hurt the REIT if occupancy continues to fall.
As of the fourth quarter of 2022, Office Properties had generated cash available for distribution (CAD) of $2.62 per share over the preceding four quarters. That was down from $3.30 per share as of the third quarter. Analysts at RBC are expecting that figure eventually to fall $2.17 per share sometime this year or in 2024, which would slump below Office Properties' current annual dividend payments of $2.20 per share. Given the CAD trend and the bleak outlook for office space, I would avoid this high-yield stock.
