Dividend investing is popular again. Investors have taken to heart Jeremy Siegel's studies, which show that higher-paying stocks tend to offer greater returns over time than low- or no-yield stocks.
The highest-paying dividend stocks can be very tantalizing. As long as a stock yielding 15% doesn't lose value, you'll make 15% in one year! In more cases than not, however, an astronomical yield is a bad sign for a stock. Since dividend yields and stock prices move in opposite directions, a high yield usually means investors have begun to worry about the business and driven down its stock price.
However, certain types of companies, such as REITs have to pay out most of their income as dividends, so their yields will be higher than "normal." But dividends aren't guaranteed; you need to make sure a business is generating enough cash to pay its dividend, or your investment could be disastrous.
I ran a screen for the highest-paying dividend stocks. The only limitation I've set this time is that the stocks must have a market cap greater than $400 million and must be a corporation, so no REITs or MLPs. I've also excluded stocks for which a special dividend heavily influenced the yield.
Here are the top 25 highest-yielding stocks the screen produced:
Market Cap (Millions)
Dividend Yield (%)
Arlington Asset Investment
Ship Finance International
R.R. Donnelley & Sons
National Presto Industries
First Financial Bancorp
New York Community Bancorp
Capitol Federal Financial
Valley National Bancorp
Nordic American Tankers Limited
Giant Interactive Group
Source: S&P CapitalIQ.
These stocks are a good place to start your research, but they're not formal recommendations.
Let's take a look at the top three.
Arlington Asset Investment has a trailing yield of 13.70%. The company invests in mortgage-backed securities, or MBSes, and follows a strategy similar to American Capital Agency . Arlington Asset has 60% of its Agency MBS portfolio in MBSes originated under the Home Affordable Refinance Program, or HARP. These are preferable to other MBSes, as they've already been refinanced and thus have a lower chance of prepayments and further refinancing. American Capital Agency has 77% of its portfolio invested in MBSes originated under HARP. There's one key difference, though, between the two: Arlington Asset is not a REIT.
Before the company's spinoff from FBR in 2009, the company was a REIT but then decided to revoke the REIT status to take advantage of operating and capital losses. As of Dec. 31, the company had $230 million of net operating loss carry-forwards and $285 million of capital loss carry-forwards. The company can charge net income and capital gains against these and thus not owe any taxes. Arlington recently did a 3.45 million-share offering, the proceeds of which the company intends to use for buying more MBSes. With a low forward P/E of 6.5, Arlington Asset looks undervalued, though that could stem from the company's small size, as well a restriction prohibiting investors from taking more than a 4.9% stake in the company, so as to protect its net operating losses and net capital losses.
Windstream is second on the list, with a trailing yield of 12.2%. This rural telecom provider has been working to reinvent itself as landline phone usage continues to decline, and throughout the transition, the company has continued to pay a $0.25-per-quarter dividend. Other rural telecoms facing similar challenges have had to cut their dividends. Most recently, CenturyLink cut its dividend by 25% in February, and the stock was pummeled afterwards.
Windstream currently has a payout ratio above 85%. Odds are it will have to cut its payout at some point, and the shares will probably take a massive hit if it does. If you're willing to bet otherwise, I highly recommend you read Dan Caplinger's analysis of three areas Windstream investors should watch. For me, though, I'd pass on Windstream.
Pitney Bowes comes in third with a trailing yield of 10.4%. This company provides services focused on physical mail -- think fliers, postage, junk mail, and the like. With mail volumes declining as more publications and advertising go digital, the company has been trying to transition its business away from mail and toward business services, geocoding, and analytics. Transitioning, though, takes a lot of money, and Pitney Bowes has stopped increasing its dividend, taking it off the list of dividend aristocrats. While shares look cheap at a P/E of 6.7, the company's earnings are steadily dropping. With a payout ratio near 70% and declining a declining business, there's a good chance Pitney Bowes will have to cut its quarterly dividend. I'd pass on this one.
Foolish bottom line
Remember, these seemingly irresistible yields could be ticking time bombs, so do your own due diligence. Also make sure you diversify your picks across various sectors. As investors relearn every decade or so, you never want to put all your eggs in one basket -- no matter how tempting the dividends are.
If you're on the lookout for high-yielding stocks, The Motley Fool has compiled a special free report outlining our nine top dependable dividend-paying stocks. It's called "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can access your copy today at no cost! Just click here.
The article The 25 Highest Dividend-Paying Stocks in April originally appeared on Fool.com.
Find Dan Dzombak on Twitter, @DanDzombak, or on his Facebook page, DanDzombak. He owns shares of Frontier Communications. The Motley Fool recommends Exelon, Giant Interactive Group, and Seadrill and owns shares of National Presto Industries, Seadrill, and United Online. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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