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 tantalizing. So long as a stock yielding 15% doesn't lose value, you'll make 15% in a year! In more cases than not, however, an astronomical yield is a bad sign for a stock. Because 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. Further, 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.
Keep in mind, however, that certain types of companies, such as real-estate investment trusts, or REITs, must pay out most of their income as dividends, so their yields will be higher than "normal."
I ran a screen for the highest-paying regular dividend stocks; the only limitations I've set this time are 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:
|Ranks||Company||Market Cap (millions)||Dividend Yield|
|2||Ship Finance International (NYSE:SFL)||$1,544||9.42%|
|8||Nordic American Tankers||$577||7.32%|
|14||Valley National Bancorp||$1,960||6.62%|
|16||R.R. Donnelley & Sons||$3,009||6.28%|
|18||New York Community Bancorp||$7,235||6.09%|
|21||Diamond Offshore Drilling||$8,485||5.73%|
Note: These stocks are a good place to start your research, but they're not formal recommendations.
I covered Windstream last month. Nothing has changed about the company's debt situation. As I wrote, "Investing in Windstream looks like picking up quarters in front of a steamroller; sooner or later you're going to get crushed." I would still pass on the stock.
Let's look at the second-highest-yielding dividend stock this month: Ship Finance International.
Ship Finance International owns ships and drilling rigs, which it leases out to operators on long-term contracts. The company came public in 2004 as a spinoff from Frontline (NYSE:FRO). Both are owned by Norwegian billionaire shipping magnate John Fredriksen, whose other companies include oil driller SeaDrill (NYSE:SDRL), distressed shipper Frontline, healthy shipping company Frontline 2012, and liquefied-natural-gas shipper Golar LNG (NASDAQ:GLNG).
Fredriksen's companies are all interrelated, with Ship Finance International starting out in 2004 with its only client as Frontline. The company has been lowering its exposure to Frontline by adding customers, and it currently has just 15 supertankers and five Suezmax crude carriers chartered to the company, down from a high of 50 in 2005. This is still a large amount of ships, and investors should take note as the tanker market continues to be squeezed by the substantial drop in U.S. oil imports.
Ship Finance International's ties with Frontline are getting more complicated, however. Ship Finance International announced last week that it had agreed to sell two of its ships -- the two with the highest charter rates paid by Frontline. For terminating the long-term contracts on the ships, Frontline agreed to pay Ship Finance International $11 million up front and give Ship Finance International a $79 million, 7.5% amortizing note with a similar but reduced profile to the long-term contracts. So, while Ship Finance International only has 20 ships leased to Frontline, it's more like 20 ships and two contracts.
It's not all bad news. The company has diversified into offshore drilling rigs, oil rigs, and ships that service them; half of the company's fixed-charter revenue now comes from the offshore sector. It should be noted that two of its drilling ships are chartered to Seadrill.
One aspect that all of Fredriksen's businesses have in common is their heavy usage of debt. Ship Finance International has been steadily lowering its debt-to-equity ratio, which now sits at 1.5, down from a high of five, which was hit in 2009.
There are two main risks with Frontline. The first is that circumstances could get worse at Frontline, which would deal a blow to Ship Finance International. While Ship Finance International leases all of it ships on fixed-price long-term contracts, contracts can always be renegotiated in times of weakness, as has already happened in the case of the company's contracts with Frontline. A second big risk is a potential liquidity crisis, which is always a possibility with companies that use lots of leverage.
Warren Buffett has made billions jumping over one-foot hurdles. Ship Finance International is certainly not a one-foot hurdle. There are easier-to-understand businesses out there, and you can wrap your head around their margin of safety -- or lack thereof. I'd pass.
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.