10 Highest-Yielding Dividend Stocks

By Markets Fool.com

Image source: Getty Images.

Continue Reading Below

With interest rates still near historical lows, investors nearing retirement are rightly interested in some of the highest-yielding dividend stocks on the market. Of all the companies listed on the S&P 500, the 10 listed here have the highest yields. But beware: If you read on, you'll see that not all that glitters is gold.

Company

Dividend Yield

Frontier Communications

13.21%

CenturyLink

9.08%

Staples

5.54%

AT&T(NYSE: T)

5.37%

Entergy Corporation

5.16%

Pitney Bowes

4.93%

Mattel

4.92%

Ford(NYSE: F)

4.89%

Verizon(NYSE: VZ)

4.83%

CF Industries

4.32%

Data source: Finviz.com. Yahoo! Finance. Data accurate as of market close on Nov. 11, 2016. This list does not include REITs or limited partnerships (LPs).

Some of these dividend payers are offering a pretty tempting premium to invest in their company. But what if we dig further?

Paring down the list

Continue Reading Below

Since you are only looking for healthy dividends to invest in, we can winnow down this list by removing those with dividends that appear unsustainable. That means looking to see if any of these companies have used more than 90% of their free cash flow (FCF) to pay dividends over the past two years.

When this is the case, it can be difficult for a company to grow its dividend. Additionally, if a company's business deteriorates, the dividend payment itself may eclipse FCF, which is a sure sign of unsustainability.


Create column charts

Data source: Yahoo! Finance. (100%) for CF Industries and Entergy are symbolically used to show that the companies were FCF negative for the corresponding time frames.

Right off the bat, we can throw out Frontier, Staples, CF Industries, Mattel, and Entergy. That leaves us with five companies to choose from.

Two more dividends to throw out

Some of these companies are in dying industries that would be prudent to avoid. Although the stocks could provide a substantial return if they figure out a way to remain relevant, I wouldn't put my own money there.

The first that fits into this category is Pitney Bowes. The company made a name for itself by designing stamp machines for the U.S. Postal Service. While that was a very profitable endeavor, I shouldn't need to explain why that isn't the case anymore. Since then, the company has pivoted to focus on customer information collection and e-commerce solutions. While those could pan out, its hard to see what sustainable competitive advantages the company has in this area.

I would also throw CenturyLink into the same basket. The regional -- and increasingly international -- telecom announced earlier this month that it will acquire Level3 Communications. While the move might look good on paper, CenturyLink established a pattern of overpaying for companies that under-delivered with Qwest. Even though the company is a cash cow right now, without being one of the top dogs in the industry, I don't see this being a great long-term holding.

And then there were three...

That leaves us with AT&T, Ford, and Verizon. AT&T and Verizon have almost always been on this list. Each company has slow growth in terms of revenue and high fixed costs -- which means you probably won't see gangbusters growth on the bottom line, or in the dividend. But both remain solid deals as America's No. 1 (Verizon) and No. 2 (AT&T) wireless providers.

Ford, on the other hand, is a very cyclical play. The reason the stock is so high now is that investors probably believe we've hit the top of the global car-buying cycle, and we're about to start seeing a decline as car drivers the world over wait to make their next purchase. If you're a long-term, buy-to-hold investor who has faith in the company, now is a decent time to make a starter position -- but I wouldn't go all-in quite yet.

So there you have it: Of all 10 of the highest-yielding dividend stocks on the market today, just three pass the sniff test. While not every one might be right for you, they offer a good starting place for your search of excellent dividends.

10 stocks we like better than Ford
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Ford wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 7, 2016

Brian Stoffel has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Ford. The Motley Fool recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.