The market is in a relentless selloff, and you know what that means for dividend stocks: Yields are going up. That’s more of a curse than a blessing when searching for stocks to buy, because anytime a dividend stock achieves some kind of eye-watering yields, chances are there’s something seriously wrong.
Just look at the stocks in the S&P 500 with the highest yields. Energy sector dividend stocks figure prominently on the list because of the rout in oil prices. Indeed, some of these names sport yields that put junk bonds to shame. Too bad it’s probably only a matter of time before they’re forced to cut or suspend their dividends.
Real estate investment trusts (REITs) are also over-represented on this list of high-yielders, but that doesn’t automatically make them stocks to buy. REITs usually don’t fare well at the beginning of a rate-hike cycle or the end of an expansion, wherever we may be right now. Even if their payouts remain stable, odds are that further price depreciation will generate nothing but negative total returns.
The bottom line is that when you’re looking for dividend stocks to buy, you generally want a rising yield to be driven by a company adding cash to its payout. Sure, sometimes you can find a bargain in high-yield name with a sputtering share price, but it’s not all that common.
The dividend yield on the S&P 500 is up to 2.32% from 1.98% a year ago, according to Birinyi Associates.
To get a sense of how crazy — and possibly dangerous — some yields are getting, here’s a look at the top payers in the S&P 500. (Note: Dividend yields as of Feb. 12.)
Top Dividend Stocks #10: Iron Mountain (IRM)
IRM Dividend Yield: 7.29%
Document management company Iron Mountain Inc (IRM) is a frequent member of this list because of its troubled prospects.
No, it’s not easy to be a REIT in a rate-hike cycle, but IRM’s problems go beyond that. Shares went into free fall at the start or summer when an analyst downgraded it to “Underperform” (sell) because of a “chronic cash shortfall.”
Cash problems should set off alarms when it comes to the sustainability of any dividend. If your strategy is to wait out price depreciation in a stock, it is absolutely imperative that the dividend remains safe.
Top Dividend Stocks #9: Ensco Plc (ESV)
ESV Dividend Yield: 7.45%
Ensco (ESV), a U.K.-based oil and gas exploration company, returns to the list of S&P 500 dividend stocks with the highest yields, but only because shares have continued to crash.
Despite its prominence in the industry, ESV doesn’t have a chance as the rout in oil prices continues unabated. The stock is off more than 70% over the past 52 weeks and 45% for the year-to-date.
With energy prices under wraps, it’s hard to see ESV generating any price upside. Even with the healthy dividend, this name looks primed for more negative total returns.
Top Dividend Stocks #8: Navient Corp (NAVI)
NAVI Dividend Yield: 7.61%
Last year’s selloff in Navient Corp (NAVI) accelerated in 2016, lifting the dividend yield to dubious levels.
NAVI, which is an educational-loan manager, is getting hammered because of new constraints on its own funding level. Navient’s credit facility through Federal Home Loan Bank of Des Moines would be reduced from a maximum borrowing limit.
Shares have lost nearly 60% of their value over the past 52 weeks and 17% YTD. But NAVI sure doesn’t look like a bargain. An earnings miss, a plunge in quarterly revenue and a junk bond credit rating make NAVI look like a dog.
Top Dividend Stocks #7: CenturyLink Inc (CTL)
CTL Dividend Yield: 7.91%
Like other regional telecommunications stocks, CenturyLink Inc (CTL) sports an eye-popping yield. Even better, shares are having a great start to the year.
CTL is up 15% YTD, but that’s kind of atypical for this name. After all, the stock is still down 25% over the last 52 weeks, wiping out any benefit from the payout, and then some.
CTL’s investment in broadband service is paying off, but we’ve seen shares pull a head-fake before. It’s also important to keep in mind that CTL hasn’t raised its dividend for 12 consecutive quarters, and the company even reduced its payout back in 2013.
Top Dividend Stocks #6: Seagate Technology PLC (STX)
STX Dividend Yield: 8.68%
The dividend yield on hard drive maker Seagate Technology PLC (STX) has come down a bit recently but it still sits in warning sign territory. Oh, and it pays out more in dividends than it makes in income.
Sentiment on STX stock has turned sour for a number of reasons: Margins are under pressure, there are indications that it’s losing market share in enterprise, and rivals Western Digital (WDC) and SanDisk (SNDK) agreed to a merger.
It also doesn’t help that the PC business is gradually receding. With shares still struggling, this dividend yield doesn’t look worth it.
Top Dividend Stocks #5: Murphy Oil Corporation (MUR)
MUR Dividend Yield: 8.77%
Murphy Oil Corporation (MUR) is another energy stock paying huge dividends because shares are getting shellacked.
MUR is an exploration and production company, and there’s not much demand for it to find more oil and drill more wells. At some point, oil will bottom out and stocks like MUR will have big rebounds. It doesn’t look like we’re anywhere near that yet.
MUR is down about 70% over the last year and — like most stocks — started 2016 on the skids as well. If you buy this stock for the dividend, you’re not going to see positive total returns for … well, who knows when.
Top Dividend Stocks #4: HCP, Inc. (HCP)
HCP Dividend Yield: 8.8%
Shares in real estate investment trusts like HCP, Inc. (HCP) typically come under pressure as interest rates rise. They really shouldn’t, but as dividend stocks, REITs compete with bonds for investors dollars.
That only partly explains why HCP stock is down about 30% YTD. HCP gave disappointing quarterly guidance tied to ongoing struggles at its HCR Manor Care business. Analysts also have concerns about a glut in senior housing.
The price action is ugly, but the dividend is probably safe. HCP is a member of the S&P Dividend Aristocrats, which is a collection of stocks that have raised their dividends every year for at least a quarter of a century.
Top Dividend Stocks #3: Frontier Communications Corp (FTR)
FTR Dividend Yield: 10.07%
Like its rival CTL, Frontier Communications Corp (FTR) is a regional telco with an absurdly high yield. But to the company’s credit, it has always been good for it.
FTR has a reliable dividend with a 10-year-plus history of uninterrupted payouts. Ample cash flow and a decent balance sheet should keep that streak alive. The downside is that FTR doesn’t have an illustrious history of long-term price performance.
FTR had a great two-year run — but that was two years ago. Over the past five years, the total return on FTR stock has been a 30%. Even with those outrageous dividends, it’s been very hard to get a positive return out this stock in a buy-and-hold portfolio.
Top Dividend Stocks #2: Oneok, Inc. (OKE)
OKE Dividend Yield: 12.54%
The thinking heading into the downturn was that pipeline companies should be in better shape than other energy players. After all, they just collect a toll on the movement of product. It hasn’t worked out that way, though; OKE is off 15% YTD and 55% in the past year.
Despite its travails, the OKE dividend appears safe. Not too long ago, OKE issued upbeat 2016 guidance and reaffirmed its outlook for cash flow available for dividends.
Top Dividend Stocks #1: Williams Companies Inc (WMB)
WMB Dividend Yield: 19.26%
Williams Companies Inc (WMB) comes with a big fat asterisk. The natural gas pipeline operator agreed to sell itself to Energy Transfer Equity (ETE) three months ago and now the deal might fall through.
There’s also the little problem that energy infrastructure industry is getting hammered by oil prices like every other name in the sector. WMB shares were down almost 50% YTD before Tuesday’s 10% jump.
If ETE doesn’t quit, WMB shareholders can look forward to a special dividend before the deal closes. They also should get a generous stream of distributions, as ETE is another high yielder.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.