The Top 10 S&P 500 Dividend Stocks for July

Yields keep rising ... but on price weakness, driven partly by the threat of a Federal Reserve rate hike

By Dan Burrows, InvestorPlace Feature Writer

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It’s been pretty much the same-old story for dividend stocks all year — and then some. The threat of higher interest rates is pushing down the prices of dividend stocks, but that in turn is pushing up their yields.

The Top 10 S&P 500 Dividend Stocks for JulyIndeed, the weakness in dividend stocks is so pronounced that the yield on the S&P 500 has moved up to north of 2%, vs. 1.89% a year ago.

The problem for dividend stocks is that they compete with bonds for investors’ dollars, and with a Federal Reserve rate hike on the horizon (albeit with an uncertain time horizon), yields on bonds are looking more attractive.

Dividend stocks also suffer from the same macroeconomic forces that are hurting stocks this year. From a stronger dollar to lower oil prices, there’s no shortage of issues to weigh on corporate earnings and revenue.

That’s why it pays to be cautious with most of the stocks that have the highest dividend yields in the S&P 500. A high yield is often a sign of a sick stock, and share-price deterioration has some of these names ready for the intensive care unit.

That doesn’t mean that every stock on the list of the S&P 500’s highest-yielding dividend stocks is a dog — just that due diligence is as important as ever. Some of these names have a great track record of dividend payments (and loads of cash flow to boot.) Some are much more risky.

Here are the S&P 500 dividend stocks with the highest yields right now (as of July 8):

Top S&P 500 Dividend Stocks (#10): AT&T (T)

Top S&P 500 Dividend Stocks (#10): AT&T (T)T Dividend Yield: 5.5%

The broader market is up less than 1% for the year-to-date, and it’s getting beaten by some of the most defensive names and sectors.

It’s no secret that healthcare stocks are pacing the S&P 500. Less well-known is that boring old AT&T (T) is outperforming the benchmark index by more than 3%.

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.

Interestingly, getting booted from the Dow Jones Industrial Average might have been the best thing that’s happened to T in years. Shares are up nearly 5% since then. Add in the always-generous dividend, and AT&T has been a total return champion in an otherwise lackluster year for equities.

Top S&P 500 Dividend Stocks (#9): Baxter International (BAX)

Top S&P 500 Dividend Stocks (#9): Baxter International (BAX)BAX Dividend Yield: 5.6%

Baxter International (BAX) makes its debut on the list of S&P 500 stocks with the highest dividends, but not for the reason investors like. Yes, BAX is riding a seven-year streak of dividend hikes, but the yield is up because the stock is down.

The maker of medical products and treatments recently spun off its biopharmaceutical division, now known as Baxalta (BXLT). Shares in BAX rose smartly ahead of the split because traders and investors wanted a piece of BXLT.

However, the completion of the deal naturally caused a drop in Baxter’s price, and the preceding run-up helped Once the deal was completed, however, a selloff in BAX ensued. Shares are now down more than 7% for the year-to-date, and some analysts say it’s still overvalued.

Throw in currency headwinds, margin pressure and competition from generics, and BAX stock has plenty of challenges ahead.

Top S&P 500 Dividend Stocks (#8): Mattel (MAT)

Top S&P 500 Dividend Stocks (#8): Mattel (MAT)MAT Dividend Yield: 5.9%

Toymaker Mattel (MAT) is in the midst of a turnaround, but it sure is taking a long time. MAT has been a rotten stock for a year-and-a-half now.

Sure, it showed some signs of life in the spring, but the roots didn’t take, leaving MAT down 16% so far this year.

MAT shares have been mired in a 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 will be okay, it will be hard to overcome the fact that rival Hasbro (HAS) beat out Mattel for the the rights to Walt Disney Co’s (DIS) Disney Princess dolls, among other challenges.

Wall Street’s seemingly no more optimistic now than it has been, with shares flat over the past month, and Zacks recently downgrading MAT stock to “sell.”

Top S&P 500 Dividend Stocks (#7): HCP (HCP)

Top S&P 500 Dividend Stocks (#7): HCP (HCP)HCP Dividend Yield: 6%

Shares in this healthcare real estate investment trust are on the upswing so far in July, but HCP (HCP) is still down more than 13% for the year-to-date.

It’s just tough to be a REIT these days.

REITs like 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. To wit, the broader Vanguard REIT Index Fund (VNQ) is off some 5% so far this year.

With a 29-year track record of rising dividends, HCP has proven to be a solid defensive stock, but the market doesn’t much like its shorter-term prospects. After all, HCP is dependent on a limited number of operators and tenants, and that can put cash flow at risk.

Top S&P 500 Dividend Stocks (#6): Iron Mountain (IRM)

Top S&P 500 Dividend Stocks (#6): Iron Mountain (IRM)IRM Dividend Yield: 6.22%

Iron Mountain (IRM) — another REIT — is getting hammered in 2015, which is not a good way to lift a dividend yield. In addition to the market’s general bias against REITs ahead of a rate hike, IRM has plenty of company-specific problems too.

IRM went into free fall 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.

If that wasn’t enough, IRM missed quarterly revenue estimates due to fluctuations in recycled paper prices, the stronger dollar and online alternatives to stored records are dragging on results.

Iron Mountain is now down 20% for the year-to-date. With everything that’s hitting IRM stock, there’s good reason to expect more price weakness ahead.

Top S&P 500 Dividend Stocks (#5): Oneok (OKE)

Top S&P 500 Dividend Stocks (#5): Oneok (OKE)OKE Dividend Yield: 6.2%

Oneok (OKE) stock appears to have stabilized in the last month or so, but thanks to a steep decline for the year-to-date (roughly 20%), OKE remains high on this list of high-yield dividend stocks.

But you can’t really blame OKE for its troubles. Like the rest of the energy sector, Oneok 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 (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 say gas utilities should be in better shape than other energy players in 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)

Top S&P 500 Dividend Stocks (#4): CenturyLink (CTL)CTL Dividend Yield: 7.3%

CenturyLink (CTL) is one of a few regional telecommunications companies in the S&P 500 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.

Shares are now off more than 25% for the year-to-date, and that should serve as an important reminder to dividend investors. Oftentimes, when a yield rises, it’s because the market is down on the stock’s prospects.

As for CTL, 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.

More positively, as dangerous as a 7.3% yield sounds, CTL looks good for it, thanks to gushers of free cash flow.

Top S&P 500 Dividend Stocks (#3): Windstream Holdings (WIN)

Top S&P 500 Dividend Stocks (#3): Windstream Holdings (WIN)WIN Dividend Yield: 8%

Like CTL, Windstream Holdings (WIN) is a regional telecom known for having an abnormally high dividend yield — and it’s about to climb even more.

WIN will pay a prorated dividend of 11.04 cents in mid-July, but it expects to lift its payout to 15 cents quarterly, or 60 cents a year. That would boost the yield on the dividend to close to 11% at the current share price.

The complicated dividend situation is a results of WIN spinning off wireline assets to Communications Sales & Leasing (CSAL) — yet another REIT — and performing a 1-for-6 reverse stock split.

WIN has a high debt load, and that spooks some investors. True, the company has always had enough free cash flow to service the fat dividend, but you have to be leery of any stock with a double-digit yield.

Top S&P 500 Dividend Stocks (#2): Frontier Communications (FTR)

Top S&P 500 Dividend Stocks (#2): Frontier Communications (FTR)FTR Dividend Yield: 8.7%

Frontier Communications (FTR) is the last of our regional telcos with sky-high yields. Unfortunately for anyone holding FTR stock, that yield is getting higher all the time.

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 27% 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 makes it hard to like this stock.

Top S&P 500 Dividend Stocks (#1): Noble Corp (NE)

Top S&P 500 Dividend Stocks (#1): Noble Corp (NE)NE Dividend Yield: 10.13%

Noble Corp. (NE) never intended to be the S&P 500 stock with the highest dividend yield, but forces beyond its control have slammed the stock.

Like other offshore oil drillers, Noble is getting hammered by the drop in oil prices. Indeed, the oil-price slump that started about a year ago has cut NE stock by 9% this year and more than 50% over the past 52 weeks.

Although NE beat earnings and revenue estimates back in April. True, margins expanded, but the market doesn’t much like any stock that’s tied to the price of oil. Besides, even with margin improvement, low oil prices have rigs owned and operated by Noble charging painfully low day rates.

Worse, oil prices are back in a slump, threatening bear market territory yet again.

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.

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