Dividend stocks are coming under increasing pressure as the market girds for a possible Federal Reserve interest-rate hike. Some better-than-expected economic news — especially out of the labor market — has heightened concerns that higher interest rates could come sooner rather than later.
Dividend stocks compete with bonds for investors’ attention, so anything that makes bonds more attractive has the potential to hurt equity income names. If dividend stocks have something going for them in this environment, it’s at least that yields are rising for anyone with fresh capital to deploy.
After all, yields on dividend stocks rise as their share prices fall — something we’ve seen a lot of lately from the S&P 500’s highest dividend yields. From 5% to almost 9%, there are some tempting payouts to be had from the index’s payout leaders.
And now for the fun warning: Most of these companies are having terrible years so far, so while these are certainly the top-yielding stocks in the S&P 500, a few of these might be traps. It’s dangerous to chase yield, and the way most of these stocks are trending right now, you can expect more price losses ahead.
As we look through this list of the S&P 500’s highest-yielding dividend stocks, we’ll point out the risks where we see them, as well as the places where you can feel a bit more secure about the payout.
Here are the S&P 500 dividend stocks with the highest yields right now (as of June 10):
Top S&P 500 Dividend Stocks #10: CenterPoint Energy (CNP)
CNP Dividend Yield: 5.2%
CenterPoint Energy (CNP) is a newcomer to the list of S&P 500 dividend stocks with the highest yields, but as a utility, it’s certainly not out of place.
Still, the way CNP made it onto this list isn’t exactly reassuring from an investment standpoint.
CenterPoint’s dividend yield is up because CNP stock is down. Indeed, it has plunged 17% so far this year because of a number of problems that aren’t just going to go away.
For one, wholesale electricity prices mimic prices for natural gas, and natural gas prices have been trending down for about 18 months. Unusually mild winter weather hurt CNP in the first quarter, causing it to miss analysts’ profit and sales estimate.
For new money, the dividend yield might look good, but be forewarned that share prices could continue to fall.
Top S&P 500 Dividend Stocks #9: AT&T (T)
T Dividend Yield: 5.4%
Getting kicked out of the Dow Jones Industrial Average turned out to be a really good thing for AT&T (T) stock. Shares were lagging the broader market by a wide margin for much of the year before T got the boot. Now it’s up more than 3% vs. a sub-2% rise in the S&P 500.
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.
No, you don’t own T for lots of price upside, but at least AT&T is committed to buying growth, and the deal for DirecTV (DTV) should close soon.
A recent upgrade from JPMorgan analysts to “overweight” (buy, essentially) helps too.
Top S&P 500 Dividend Stocks #8: Mattel (MAT)
MAT Dividend Yield: 5.7%
Toymaker Mattel (MAT) has been a rotten stock for 18 months now, although it did bounce back from a spring trough.
Mattel shuffled its top executive ranks at the beginning of the year to jump-start a turnaround, and they’ll need to work fast.
MAT shares have been mired in downtrend that only accelerated after a weak holiday selling season. Declining sales of Barbie toys — its most important product by far — are largely to blame, but other toys have failed to find traction with consumers, as well.
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 (HAS) beat out Mattel for the the rights to Walt Disney Co’s (DIS) Disney Princess dolls.
Top S&P 500 Dividend Stocks #7: Iron Mountain (IRM)
IRM Dividend Yield: 6%
Iron Mountain (IRM) stock fell off a cliff in June, hurt by an analyst’s downgrade to “underperform” (a sell) because of its chronic cash shortfall. The plunging price also forced IRM to renegotiate its deal to purchase an Australian counterpart.
That IRM missed quarterly revenue estimates didn’t help matters either, especially given the nasty macroeconomic environment that knocked the stock down by about 18% half way through 2015.
Iron Mountain 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.
With all that hitting IRM stock, there’s good reason to expect more price weakness ahead.
Top S&P 500 Dividend Stocks #6: HCP (HCP)
HCP Dividend Yield: 6%
REITs like HCP (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.
Unfortunately, investors are leery of REITs heading into a rising-rate environment; like dividend stocks, REITs compete with bonds for investors’ dollars.
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. The market is increasingly worried about HCP being dependent on a limited number operators and tenants. That puts its cash flow at risk.
Top S&P 500 Dividend Stocks #5: Oneok (OKE)
OKE Dividend Yield: 6.1%
Oneok (OKE) remains on the list of S&P 500 stocks with the highest dividend yields as shares crashed even further over the last month.
The reason? 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 21% year-to-date.
Top S&P 500 Dividend Stocks #4: CenturyLink (CTL)
CTL Dividend Yield: 6.7%
CenturyLink (CTL) is another one of those regional telecommunications companies that pay dividends with almost absurdly high yields.
True, telcos are expected to throw off big dividends, but CTL’s yield has soared mostly because its stock is having a horrible 2015 — CenturyLink is approaching 20% losses.
That serves as an important reminder to dividend investors. Over longer periods of time, CTL has been a big-time market laggard. True, it’s investing heavily in building out its broadband service, but a dwindling legacy business and higher costs rightfully scare the market.
However, as dangerous as a 6.7% yield sounds, gushers of free cash flow have made the dividend something investors can count on.
Top S&P 500 Dividend Stocks #3: Windstream Holdings (WIN)
WIN Dividend Yield: 8%
Windstream Holdings (WIN) is a familiar name to anyone who follows high-yield dividend stocks. Like other regional telcos, WIN throws off a big dividend but has an ugly chart. Indeed, WIN is off 42% year-to-date and recently notched a record low. As great as 2014 was for the stock, it’s all gone now — and then some.
WIN is leaking wireline subscribers, and it can’t replace them fast enough with broadband 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.
Windstream’s dividend situation is a little sticky thanks to the split and a prorated dividend to be paid out in June. The actual payout will be 11 cents for the shortened time period, based off a full payout of 15 cents — and based on that number, Windstream is yielding a fat 8%.
Top S&P 500 Dividend Stocks #2: Frontier Communications (FTR)
FTR Dividend Yield: 8.5%
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.
FTR just can’t seem to stanch the bleeding.
The stock is now down 26% year-to-date, which is a familiar trajectory for anyone who has held FTR for a long time. Although plenty of free cash flow makes the dividend look safe, the price action means it’s probably not worth touching.
Top S&P 500 Dividend Stocks #1: Noble Corp (NE)
NE Dividend Yield: 8.9%
Offshore oil drillers like Noble Corp (NYSE:NE) were hammered by the late 2014/early 2015 drop in oil prices, and that sent their yields skyward. Indeed, NE shares didn’t stabilize until recently, and naturally, that was thanks to an uptick in the price of oil.
NE beat earnings and revenue estimates back in April, 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.