The 25 Top-Yielding Dividend Stocks in May

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, real estate investment trusts and certain other types of companies 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 are that the dividend stocks must have a market cap greater than $500 million and must be corporations (no REITs , BDCs , LPs, MLPs , or LLCs).

Here are the 25 highest-yielding stocks the screen produced:

Source: S&P Capital IQ as of May 6, 2014.

Note: These stocks are a good place to start your research, but they're not formal recommendations.

First up is Arlington Asset Investment with a trailing yield of 13%. The company was spun off from FBR in 2009 -- it is essentially a mortgage REIT yet is structured as a corporation to take advantage of operating and capital losses sustained in the financial crisis. REITs are pass-through structures that give owners a tax savings as they are not double taxed like normal corporations, once at the corporate level and once at the individual owner level. With Arlington Asset Investment avoiding corporate taxes through its tax loss carry forwards, investors are only taxed once at the lower dividend rate instead of at the higher-income tax rate at which REIT distributions are taxed.

The company profits through its portfolio of mortgage-backed securities, 60% of which are Home Affordable Refinance Program, or HARP, loans. These loans have already been refinanced once through HARP and are ineligible for future refinancing, mitigating the prepayment risk that is a large problem with other mortgage-backed securities. With a P/E ratio of eight and a dividend yield of 13%, Arlington Asset Investment looks promising.

Second is Windstream with a dividend yield of 11%. This rural telecom has been transitioning from a focus on residential phone clients to consumer broadband and business customers. The company pays out a high 87.5% of its free cash flow as dividends. Investors have seen before with Frontier Communications and CenturyLink what happens to companies that cut their dividend. The dividend is the one thing supporting the stock, and management has stressed that keeping the payout is important. The stock looks fairly valued as long as the dividend is sustained.

The risk, however, is that if the company is unable to sustain the dividend in the face of some unforeseen circumstance, the stock will be crushed. That would be a great time to buy as the company will then have much more flexibility with its capital allocation and will be trading far lower. Until then, investing in Windstream looks like picking up quarters in front of a steamroller -- you run a real risk of getting crushed.

Seadrill is third with a trailing yield of 10.5%. The company owns offshore oil rigs that it rents to energy companies. The stock has been crushed this year with the rest of its industry as investors grow afraid of a sector-wide slowdown. Offshore drilling is one of the most expensive ways to access oil and gas. While the rewards can be great, the up-front investments needed are massive, which is one of the reasons that most oil and gas companies rent rigs from Seadrill and its peers instead of owning their own.

As such, Seadrill's ultra-deepwater fleet is 96% contracted through 2014 while its shallow-water fleet is 92% contracted. Investors are worried about the longer-term pricing in the industry, but SeaDrill is in a great place competitively as it has some of the newest ultra-deepwater drillships among the worldwide fleet.

For investors, Seadrill has long had a variable dividend policy that is "guided by earnings expectations, market prospects, current capital expenditure programs as well as investment opportunities." If industry pricing continues to weaken SeaDrill's dividend could easily be cut, but many believe the company will weather the storm as its new ships take market share from its rivals' older vessels.

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.