Investing in stocks with monster dividend yields can be scary. Income investors saw this firsthand recently as chemicals giant LyondellBasell (LYB +10.48%) slashed its dividend in half. Before the cut, it had the highest dividend yield in the S&P 500 at 12.6%, more than 10 times the index's level (1.2%).
Given the higher risk of a dividend reduction, ultra-high-yield stocks aren't for everyone. However, here are three intriguing options for those seeking a big-time income stream.
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Conagra
After slashing its dividend, LyondellBasell no longer has the highest dividend yield among S&P 500 members. That distinction now belongs to Conagra Brands (CAG 4.68%). The prepared foods company currently yields 7.4%.
The maker of Marie Callender's, Slim Jim, and other grocery store brands is in a better position to maintain its monster dividend than its predecessor. Conagra Brands expects its dividend payout ratio will be around 80% of its earnings this year. While that's above its 50% to 55% target range, LyondellBasell paid out dividends well in excess of its earnings before its recent reduction.
NYSE: CAG
Key Data Points
Like LyondellBasell, Conagra Foods is facing its share of headwinds as inflation is eating into its margins and demand for its products. However, the company has started to see some positive underlying momentum in its business, driving its outlook that its sales should start growing again in the second half of its fiscal year. Meanwhile, it has reduced its debt by more than 10% over the past year, strengthening its financial foundation. While the risk of a future dividend cut remains elevated if inflation heats back up, Conagra offers an appetizing income stream these days.
Delek Logistics Partners
Delek Logistics Partners (DKL 0.45%) is a master limited partnership (MLP) focused on operating energy midstream assets (e.g., pipelines and gas processing plants). MLPs can complicate tax filing due to the Schedule K-1 Federal Tax forms they send each year. That's a big reason why Delek currently offers an 8.9% distribution yield.
NYSE: DKL
Key Data Points
The MLP has an exceptional record of paying distributions. It recently extended its streak of distribution growth to 52 consecutive quarters (13 years in a row). Delek generates relatively stable cash flows backed by long-term contracts. Last year, the MLP produced enough cash to cover its distribution by 1.2 times.
Delek uses the cash it retains after paying distributions, along with its balance sheet, to invest in expanding its operations. The company completed its Libby 2 gas plant last year and the acquisition of Gravity Water Midstream. Meanwhile, it's making progress on its comprehensive acid gas injection and source gas treating solution at Libby, positioning it for future growth. It also has the financial capacity to make new investments to expand its operations. That should give Delek the fuel to continue increasing its high-yielding distribution
Starwood Property Trust
Starwood Property Trust (STWD 1.12%) is a real estate investment trust (REIT). While Starwood is the largest REIT focused on investing in commercial mortgages, it has a much more diversified platform than most mortgage REITs. It also has residential and infrastructure lending businesses and invests directly in real estate equity. The company's increasingly diversified operations help support its 10.7% dividend yield.
NYSE: STWD
Key Data Points
The REIT's latest diversification move came last year when it acquired Fundamental Income Properties for $2.2 billion. Fundamental owns over 450 properties secured by long-term net leases (17-year weighted-average term and 2.2% average annual rent escalations). This expandable portfolio will provide Starwood with a very stable and steadily rising income stream to support its dividend.
Unlike most mortgage REITs, Starwood has never cut or suspended its dividend. Instead, it has maintained its current payout for over a decade. Its increasingly diversified business model should enable the REIT to continue delivering a stable dividend to investors.
Monster income streams
Investing in ultra-high-yielding dividend stocks can be riskier. However, not all monster dividend stocks are at an immediate risk of reducing their payouts. Conagra, Delek Midstream, and Starwood appear poised to continue paying their current dividend levels. That makes them enticing options for those seeking a lucrative income stream.
