It's been shown time and time again that dividend-paying stocks tend to outperform their non-dividend-paying peers, but not all dividend-paying stocks are created equal. Consider these three high dividend-paying stocks as an example. They all offer investors an arguably eye-popping dividend yield, but each is also facing significant challenges to its business model that could make them a risky bet for retirees.
Selena Maranjian: This recommendation of a dividend stock that retirees should avoid will hurt -- because its dividend yield was recently 12.2%! The company is Windstream Holdings Inc (NASDAQ:WIN), and for years it has been a major rural telecom company. That has become problematic in recent years, with more Americans cutting their landline services and moving entirely to mobile phones. The company has responded by offering broadband and more services to businesses, such as cloud computing services, with many hopeful that it can turn itself around.
Windstream may end up a great long-term investment, but right now, its future is more uncertain than is ideal for retirees. A glance at its financial statements offers some reasons for concern: Profit margins have been falling significantly over the past few years, as has net income. (On the other hand, it's not all bad -- revenue and free cash flow have fluctuated but are above where they were a few years ago, though revenue in the last quarter dropped a bit, year over year.)
But there's more afoot with Windstream. The company is splitting in two, spinning off its network assets into a publicly traded real estate investment trust, which will be required to pay out 90% of its profit as dividends. The overall dividend payment will drop, too, by about 30% overall, as the company tackles its hefty debt load. Another concern, suggesting unwelcome instability for retirees, is the departure of the CEO. Simply put, I think there are safer places for retirees to park their valuable dollars.
Dan Caplinger: Despite its high dividend yield, AT&T (NYSE:T) is a somewhat dangerous stock for retirees and other conservative investors right now. For years, the company has enjoyed a virtual duopoly in the U.S. wireless market with fellow Dow component Verizon (NYSE:VZ), and while the two companies have competed vigorously against each other, they've also managed not to engage in actions that would jeopardize their mutual profitability.
Recently, though, smaller players like T-Mobile US (NASDAQ:TMUS) and Sprint (NYSE:S) have taken more aggressive steps to become bigger players in the industry, cutting prices on their services and coming up with some innovative plan options that drawn some customers away from AT&T and Verizon. In response, AT&T has had to make price concessions of its own, and that has raised fears that pricing for mobile services could well follow the same pattern as long-distance telephone service in the 1990s and early 2000s. When that happened, it crushed AT&T and its long-distance competitors, and only a buyout by former Baby Bell Southwestern Bell restored AT&T to some of its former glory. AT&T's 5% yield is unquestionably attractive, but with questions about whether growth will continue, it's not worth the risk even for retirees seeking income.
Annaly's dividend has been steadily falling since 2011, and there's a good chance that trend could continue for the next few years.
The reason? Annaly Capital Management, like other so-called mortgage REITs, makes a living off the "spread" between the rates it must pay for capital and what it's able to collect on mortgages. In a falling interest-rate environment, business booms. Not only is Annaly able to widen the spread, but there are a lot more homeowners who can benefit from refinancing in the low-rate environment.
Unfortunately for Annaly, rates are increasingly likely to begin a years-long pace of increases, both reducing the potential spread and the number of potential customers.
A better bet for retirees is to find companies with a history of increasing dividends and that operate in an industry that supports future growth. A big yield today might seem nice, but not if it means a cut in payouts down the road.
Dan Caplinger, Jason Hall own shares of Apple. Selena Maranjian owns shares of Apple and Verizon Communications. The Motley Fool recommends Apple, Bank of America, and Verizon Communications and owns shares of Apple and Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.