High-yield dividend stock investing is popular again. Investors have taken to heart Jeremy Siegel's studies, which show that higher-yielding stocks tend to offer greater returns over time than low- or no-yield stocks.
The highest dividend yields 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 that 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." Dividends are not guaranteed; you need to make sure that a business is generating enough cash to pay its dividend, or your investment could be disastrous.
I ran a screen for the highest-yielding stocks; the only limitations I've set this time is that the dividend stocks must have a market cap greater than $400 million, must be primarily listed in the U.S. (no ADRs), and must be a corporation (no REITs or MLPs).
Here are the top 25 highest-yielding stocks the screen produced:
| 1 | Arlington Asset Investment | $449 | 12.90% |
| 2 | Windstream | $4,695 | 12.60% |
| 3 | Vector Group | $1,453 | 9.90% |
| 4 | Frontier Communications | $4,041 | 9.88% |
| 5 | Ship Finance International | $1,434 | 9.27% |
| 6 | Consolidated Communications | $673 | 9.24% |
| 7 | BGC Partners | $928 | 8.70% |
| 8 | Compass Diversified | $800 | 8.70% |
| 9 | R.R. Donnelley & Sons | $2,271 | 8.31% |
| 10 | W&T Offshore | $1,094 | 7.91% |
| 11 | New York Community Bancorp | $5,714 | 7.72% |
| 12 | Nordic American Tankers | $550 | 7.68% |
| 13 | PDL BioPharma | $1,095 | 7.67% |
| 14 | First Financial Bancorp | $870 | 7.31% |
| 15 | Valley National Bancorp | $1,811 | 7.15% |
| 16 | Daktronics | $438 | 7.15% |
| 17 | Capitol Federal Financial | $1,756 | 6.96% |
| 18 | Costamare | $1,261 | 6.41% |
| 19 | TAL International Group | $1,378 | 6.39% |
| 20 | Cohen & Steers | $1,612 | 6.31% |
| 21 | CenturyLink | $21,274 | 6.18% |
| 22 | OneBeacon Insurance Group | $1,344 | 5.96% |
| 23 | United Online | $628 | 5.89% |
| 24 | Intersil | $1,042 | 5.86% |
| 25 | FirstEnergy | $16,177 | 5.69% |
Source: S&P Capital IQ. Data as of June 10.
These stocks are a good place to start your research, but they're not formal recommendations.
Last month I examined Arlington Asset Investment, and Windstream the month before that, so this month let's take a look at No. 3:
Vector Group (NYSE: VGR ) is the third-highest-yielding dividend stock in June with a trailing yield of 9.9%. The company has two main businesse: tobacco and real estate. The company manufactures and sells cigarettes through its Liggett Group and Vector Tobacco subsidiaries under the Pyramid, Grand Prix, Liggett Select, and Eve brands. The company is the fourth-largest cigarette manufacturer in the U.S. behind giants Altria (NYSE: MO ) , Lorillard, and Reynolds American. There are some advantages to being small. Vector has a cost advantage stemming from the settlement between Vector and the U.S.: The company does not have to make annual payments unless its market share exceeds 1.65% of the U.S. market. As such, the company positions its brands as discount cigarettes to capitalize on its advantage.
The company also invests in real estate through its New Valley subsidiary. New Valley owns a 50% stake in the largest residential real estate broker in the New York metropolitan area and stakes in various real estate properties across the country. It should be noted that Vector's ownership in New Valley is accounted for under the equity method of accounting, so its results do not flow through into Vector's financial statements.
While Vector Group looks interesting, with such a high dividend the market believes there is a problem. Looking at the financial statements, the company has a significant amount of debt, which it continuously adds to. The company has been paying out more in dividends than it brings in in free cash flow for years. In 2012 the company paid $137 million in dividends but only brought in $70 million in free cash flow. Over the past five years the debt load has tripled to $680 million and shareholder equity has remained negative. The company has been expanding its debt load by issuing debt that converts into shares. While this lowers interest payments, it destroys shareholder value. The company can provide income for some time but is slowly destroying shareholder value by issuing so much in debt. If something is unsustainable, it will stop, and you don't want to be the one left holding the bag. I'd pass on Vector Group.
However, the tobacco industry has been a great hunting ground for investors. While no tobacco companies pay as high a dividend as Vector Group, long-term investors would do well to look at Altria in the U.S. or Phillip Morris International (NYSE: PM ) . Both were part of the original Phillip Morris conglomerate that split up around 2008 by spinning off Kraft and Phillip Morris International. Both businesses are leaders in their respective markets -- Altria in the U.S. and Phillip Morris the world, excluding China and the U.S -- and have exceptionally high-returning businesses. This is in part due to both having one of the top brands in the world with Marlboro. For dividend investors, the key part is that both have long-term histories of steadily increasing their dividends. If I had to choose just one, while Altria has a higher yield than Phillip Morris (4.9% vs. 3.9%), I would go with Phillip Morris. The company has better growth prospects and a lower payout ratio, and the business is far more diversified in terms of legal risk, whereas Altria could be hurt by any laws or rulings that go against tobacco companies in the U.S.
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 an investor who prefers returns to rhetoric, you'll want to read The Motley Fool's new free report "5 Dividend Myths... Busted!" In it, you'll learn which stocks provide premium growth and whether bigger dividends are better. Click here to keep reading.
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