High-yield dividend stocks can be great for income investors, but many of them can be too good to be true. Many high dividends are a sign that a company is in trouble, or won't be able to sustain the payout in the future. And others are a sign that the stock is volatile and risky.
Source: Flickr user Matt Crampton.
However, this isn't always the case. Here are three high-yielding dividend stocks you can buy, and still sleep well at night.
Dan Caplinger: One high-yielding stock most people have never heard of is National Presto Industries (NPK +2.32%). The company has an eclectic assortment of businesses, including small household appliances, incontinence products, and ammunition and tear-gas grenades.
But what makes National Presto truly stand out is its dividend policy. Rather than following the normal course of establishing a regular quarterly payout, National Presto has put together a long track record of paying a nominal annual dividend, but then adding on a certain amount to that payout as a special dividend. When you add the two together, you get some impressive yields. For instance, right now, many news services report National Presto's yield as 1.6% based on the regular $1 annual payout. But last year, the company paid a total dividend of $5.05 per share, which works out to about a 7.8% dividend yield at current prices.
Admittedly, National Presto has suffered from falling revenue and earnings, and it's unlikely the company can sustain a $5.05 per share payout this year. Yet even a more modest dividend would still easily top the average, and with shares trading at just 14 times earnings, National Presto stock has priced in anticipated sluggishness. That would make any unexpected recovery a potential bonus for dividend investors.
Todd Campbell: Often, high dividend yields are the result of anything but a safe story, but there are some companies out there that deliver solid dividend yields and enjoy tailwinds that suggest that those yields aren't likely to drop.
One of those companies is HCP Inc. (HCP +0.12%), a real estate investment trust that focuses on the healthcare industry and offers a dividend yield of 5.2%. HCP Inc's portfolio of real estate investments includes senior housing, life sciences lab and medical office space, hospitals, and skilled nursing facilities.
Increasingly older and more insured Americans should continue to drive healthcare demand higher and that's bullish for HCP Inc.'s future occupancy rates and effective rents. Those trends appear to already be paying off for dividend investors. The company has generated a compound annual return of 15.5% since its inception in 1985 and it's boosted its dividend for 30 consecutive years, making it a member of the S&P 500 dividend aristocrats index. h
Since the company expects to deliver funds from operations growth of 6% this year, sports a portfolio that includes nearly 1,200 properties, and benefits from the fact that 10,000 baby boomers are turning 65 every day, it appears unlikely that HCP Inc. will lose its aristocratic standing anytime soon.
Jordan Wathen: Federated Investors (FII 1.08%) stands out as a very safe dividend stock. As a manager of stock, bond, and money market funds, it generates a consistent mix of fee income. Money managers are generally considered to have "sticky" business models; clients don't move money around all that often.
In addition, unlike many yield stocks, Federated Investors is poised to benefit from rising rates. Due to currently low interest rates, Federated Investors is waiving fees on its line of money market funds. Should interest rates rise from near zero, Federated will once again have the ability to start charging fees on money market assets. In 2014, fee waivers cost it roughly $130 million in operating profits.
It's also a cash-generating machine, like many asset managers are. The company has a record of producing more free cash flow than net income, effectively earning more than would appear on the net income line. The stock yields 3%, but if interest rates rise, the yield could jump significantly. Thus, it makes for a great "hedge" of sorts to balance out other dividend stocks, like REITs or utilities, which tend to perform worse in rising rate environments.
