Dividend investing is popular again. Investors have taken to heart Jeremy Siegel's studies, which show that higher-yielding stocks tend to offer greater returns over time than low- or no-yield stocks.
The highest-paying dividend stocks can be very tantalizing. So long as a stock yielding 15% doesn't lose value, you'll make 15% in one year! In more cases than not, however, an astronomical yield is a bad sign for a stock. Since dividend yields and stock prices move in opposite directions, a high yield usually means investors have begun to worry about the business and driven down its stock price.
However, certain types of companies such as REITs have to pay out most of their income as dividends, so their yields will be higher than "normal." Dividends are not guaranteed; you need to make sure that a business is generating enough cash to pay its dividend, or your investment could be disastrous.
I ran a screen for the highest-paying regular dividend stocks; the only limitations I've set this time is that the dividend stocks must have a market cap greater than $500 million, must be primarily listed in the U.S. (no American depositary receipts) and must be corporations (no REITs, BDCs, LPs, MLPs, or LLCs).
Here are the 25 highest-yielding stocks the screen produced:
| Rank |
Company Name |
Dividend Yield |
Market Cap (millions) |
|---|---|---|---|
|
1 |
Windstream (WINMQ) |
12.2% |
$4,843 |
|
2 |
Ship Finance International Limited |
10% |
$1,452 |
|
3 |
Vector Group |
9.5% |
$1,517 |
|
4 |
Frontier Communications (FTR) |
9.3% |
$4,289 |
|
5 |
Consolidated Communications |
8.8% |
$704 |
|
6 |
Compass Diversified |
8.2% |
$849 |
|
7 |
Seadrill |
7.8% |
$21,850 |
|
8 |
HollyFrontier |
7.6% |
$8,407 |
|
9 |
PDL BioPharma |
7.5% |
$1,116 |
|
10 |
RLI |
7.3% |
$1,853 |
|
11 |
First Financial Bancorp |
7.1% |
$873 |
|
12 |
CenturyLink (LUMN -6.20%) |
6.8% |
$18,987 |
|
13 |
Capitol Federal Financial |
6.6% |
$1,826 |
|
14 |
New York Community Bancorp |
6.6% |
$6,719 |
|
15 |
Valley National Bancorp |
6.6% |
$1,979 |
|
16 |
R.R. Donnelley & Sons |
6.5% |
$2,904 |
|
17 |
VimpelCom |
6.4% |
$21,969 |
|
18 |
Costamare |
6.2% |
$1,297 |
|
19 |
CTC Media |
6% |
$1,667 |
|
20 |
FirstEnergy |
5.9% |
$15,503 |
|
21 |
Pepco Holdings |
5.9% |
$4,594 |
|
22 |
OneBeacon Insurance Group |
5.8% |
$1,377 |
|
23 |
Diamond Offshore Drilling |
5.6% |
$8,719 |
|
24 |
Altria Group |
5.5% |
$69,610 |
|
25 |
PBF Energy |
5.4% |
$877 |
Source: S&P Capital IQ as of Oct. 7, 2013.
Note: These stocks are a good place to start your research, but they're not formal recommendations.
Let's look at the highest-yielding dividend stock this month: Windstream.
Windstream is a rural telecom provider that, like fellow rural telecoms Frontier Communications and CenturyLink, has been struggling to pay a stable dividend while dealing with a massive debt load. Unlike Frontier and CenturyLink, however, Windstream has not had to cut its dividend yet.
I stress the "yet" part because Windstream's cash payout ratio has steadily climbed for the past three years. It now stands above 100%, meaning the company pays out slightly more in interest expenses than it brings in in cash.
WIN Cash Dividend Payout Ratio TTM data by YCharts.
We have seen how this ends before. In February 2013, CenturyLink faced the same challenge and had to cut its dividend by 25%. The stock fell nearly as much after the announcement.
CTL Cash Dividend Payout Ratio TTM data by YCharts.
A year before that, in February 2012, Frontier Communications cut its dividend after its cash payout ratio went above 100%.
FTR Cash Dividend Payout Ratio TTM data by YCharts.
Investing in Windstream looks like picking up quarters in front of a steamroller; sooner or later you're going to get crushed. I'd pass on this stock.
Foolish bottom line
Remember, these seemingly irresistible yields could be ticking time bombs, so do your own due diligence. Also, make sure you diversify your picks across various sectors. As investors relearn every decade or so, you never want to put all your eggs in one basket -- no matter how tempting the dividends are.
