Yields on dividend stocks are slightly higher than they were at this time last year. That’s the good news.
The bad news? Those dividend yields are higher mostly thanks to slumping prices — as a stock’s price goes down, a stock’s quarterly payout comes out to an even higher percentage of that price.
Anticipation of a Federal Reserve rate hike is pressuring equity income names because dividend stocks and bonds compete for investors’ dollars. Furthermore, it’s not like stocks in general have been a fountain of price gains this year. The S&P 500 is up about 2% so far in 2015. That’s it.
Investors also need to be wary of chasing yield in this low-rate environment. Many of the S&P 500’s highest yielders are fairly dangerous for one reason or another — right now, with many of these stocks on the decline, Wall Street is trying to tell us that something’s wrong.
And if there is, remember: Dividends don’t do you much good if they’re offset (and more) by significant price losses. A dividend cut or suspension can be even more painful.
However, while most of the dividend stocks in the S&P 500 should be treated with caution — if not avoided altogether — there are a few names that belong in an equity income portfolio. For an idea of what’s out there, here are the top dividend stocks in the benchmark index with the highest dividend yields as of May 13:
Top S&P 500 Dividend Stocks #9: Iron Mountain Inc (IRM)
IRM Dividend Yield: 5.3%
Iron Mountain Inc (NYSE:IRM) had an interesting month since the last time we looked at it. The market liked it when the document storage company struck a deal to acquire an Australian counterpart for $2 billion, but it was less happy with IRM’s quarterly revenue miss.
On balance, the news drove IRM stock down, lifting the yield on the dividend to 5.3% from 5.15% in mid-April.
And unfortunately for anyone considering putting new money to work in IRM, it’s likely shares will see further weakness ahead.
For one things, IRM is a real estate investment trust (REIT), and REITs are getting punished in general these days over fears of a rate hike. And in a headache more specific to IRM, fluctuations in recycled paper prices, the stronger dollar and online alternatives to stored records are dragging on results.
Top S&P 500 Dividend Stocks #8: Oneok Inc. (OKE)
OKE Dividend Yield: 5.4%
Oneok Inc. (NYSE:OKE) remains in the list of S&P 500 stocks with the highest yields as shares slipped even further over the last month.
Even with energy prices showing some signs of life lately, OKE finds itself in the wrong business at the wrong time.
After all, OKE is the general partner of natural gas transport and storage firm Oneok Partners LP (NYSE:OKS), and gas prices have dropped in sympathy with oil prices. A first-quarter miss on both earnings and revenue underscored just how difficult the situation is. (Tough year-over-year comparisons also contributed to the miss.)
Analysts believe that gas utilities will be in far better shape during the current industry downturn, but that’s of little comfort to anyone holding OKE, which is off 13% YTD after the earnings miss.
Top S&P 500 Dividend Stocks #7: AT&T Inc. (T)
T Dividend Yield: 5.6%
Whenever a stock has an unusually high dividend yield — as many of the names in this list do — it’s because there’s something wrong with them. Happily, that’s not the case with AT&T Inc. (NYSE:T).
Historically, it’s hard to beat telecommunications companies for steady, generous and dependable dividend stocks. T has been throwing off a dividend since 1984, and it’s pretty much always the biggest dividend yield of any blue-chip company.
AT&T is a dividend battleship.
No, you don’t own T for red-hot price upside, but at least AT&T is committed to buying growth. In addition to a $50 billion deal to acquire DirecTV (NASDAQ:DTV), the telco also struck a $2.5 billion deal for the third-largest wireless company in Mexico.
Top S&P 500 Dividend Stocks #6: Mattel, Inc. (MAT)
MAT Dividend Yield: 5.8%
Toymaker Mattel, Inc. (NASDAQ:MAT) saw its stock rally sharply last month to pare some of the deep loss it’s been logging this year.
And then it started selling off once more.
MAT shares have been mired in a longer-term downtrend since last summer — one that only accelerated after a weak holiday selling season. Declining sales of Barbie toys — its most important product by far — are largely to blame.
A new management team gives hope to some analysts that MAT can turn things around, but don’t bet on it. As Warren Buffett says, most turnarounds don’t turn. Besides, there’s nothing management can do about the fact that rival Hasbro, Inc. (NASDAQ:HAS) beat out Mattel for the the rights to Walt Disney Co’s (NYSE:DIS) Disney Princess dolls.
Top S&P 500 Dividend Stocks #5: HCP, Inc. (HCP)
HCP Dividend Yield: 5.9%
REITs like HCP, Inc. (NYSE:HCP) are required to pay out most of their earnings as dividends in exchange for certain tax benefits, which is why so many of them make lists of high-yielding dividend stocks.
Add in a recent dividend hike, and the HCP dividend yield is among the fattest on the market.
As a U.S. healthcare REIT, HCP benefits from the inexorable rise in healthcare spending and an aging population. It’s also a pure-play domestic stock that’s insulated from geopolitical troubles or European credit worries. With a 29-year track record of rising dividends, HCP has proven to be a solid defensive stock.
None of that has mattered this year, however. Even after hiking its full-year profit outlook, HCP is still off almost 13% so far this year.
Investors are simply leery of REITs heading into a rising-rate environment.
Top S&P 500 Dividend Stocks #4: CenturyLink Inc (CTL)
CTL Dividend Yield: 6.3%
CenturyLink Inc (NYSE:CTL) is one of three regional telecommunications companies that pay dividends with almost absurdly high yields. True, telcos are supposed to throw off big dividends, but CTL’s yield has soared mostly because its stock is having a lousy 2015.
Indeed, after a torrid 2014, CTL is down 13% so far this year.
That serves as an important reminder to dividend investors. Over longer periods of time, CTL has been a big-time market laggard, partly because of concerns over a dwindling legacy business and higher costs.
In its favor, CTL is investing heavily in building out its broadband service and the price drop has made the dividend look better.
As dangerous as a 6% yield sounds, gushers of free cash flow make the dividend something investors can count on.
Top S&P 500 Dividend Stocks #3: Windstream Holdings, Inc. (WIN)
WIN Dividend Yield: 7.1%
Windstream Holdings, Inc. (NASDAQ:WIN), like CTL, is another regional telecom stock with ugly long-term charts and crazy-high yields.
In the case of WIN, much of the dividend yield can be attributed to some terrible returns.
WIN is off more than 35% for the year-to-date to hit an all-time low. As great as 2014 was for the stock, it’s all gone now — and then some.
Like the rest of the industry, WIN is leaking wireline subscribers and it can’t replace them fast enough with broadband and digital TV customers. A high debt load also spooks investors even as the company has traditionally had more than ample free cash flow to service the fat dividend.
Most recently, the company made a big move that included spinning off some of its assets to Communications Sales & Leasing (NASDAQ:CSAL) and performing a 1-for-6 reverse stock split. Windstream said as part of this, it now plans to pay a 60-cent annual dividend, which knocks down its yield from double digits last month to a still-ample 7.1%.
Top S&P 500 Dividend Stocks #2: Frontier Communications Corp (FTR)
FTR Dividend Yield: 7.4%
Regional telecom Frontier Communications Corp (NASDAQ:FTR) saw its dividend blow past the 7% level after shares fell off a cliff at the beginning of May. A first-quarter earnings and revenue miss were to blame.
Frontier is focusing on retaining customers, but it still lost residential and business subscribers in the most recent quarter. And even though it signed up more broadband customers, it lost a sizable number of video subscribers.
The stock is now down 18% for the year-to-date, which is a familiar trajectory for anyone who has held FTR for a long time. Indeed, FTR has lagged the broader market for six years and has done virtually nothing throughout the bull market.
Free cash flow makes the dividend look safe, but the price action means it’s probably not worth touching.
Top S&P 500 Dividend Stocks #1: Noble Corp. (NE)
NE Dividend Yield: 8.4%
Offshore oil drillers like Noble Corp plc (NYSE:NE) were hammered by the late 2014/early 2015 drop in oil prices, and that sent their yields skyward. Even a better-than-expected earnings season for the sector couldn’t stop the slide.
NE beat estimates, helped by higher contract drilling margins, but the market still has no interest in a stock that’s tied to the price of oil. After all, it’s a cyclical business, and the cycle is working against NE. Even with higher margins, low oil prices have rigs owned and operated by Noble charging painfully low day rates (or sitting uselessly idle).
As tempting as NE looks for income, investors need to beware that Noble could find its dividend on the chopping block like other names in the industry.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
