10 Highest Dividend Yielding Stocks

By Brian Feroldi Markets Fool.com

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Image Source: Getty Images.

One sound long-term investing strategy is to buy stocks that offer up high dividend yields.This strategy has become particularly enticing in today's low interest rateenvironment, since it offers investors a chance to generate a lot of income from their portfolio. However, justbecausea stock offers up a high yield doesn't make it an automatic buy, especially because sky-high yields are often accompanied by sky-high risks.Knowing that, lets take a look at the10 highest yielding stocks from the S&P 500 to see if any of them are worth buying today.For simplicity's sake, we'll exclude all real estate investments trusts, or REITs, from this article since they play by their own set ofrules.

Company

Ticker

Dividend Yield

Frontier Communications

(NASDAQ: FTR)

12.3%

CenturyLink

(NYSE: CTL)

9%

Seagate Technology

(NASDAQ: STX)

6.4%

Mattel

(NASDAQ: MAT)

5.4%

Staples

(NASDAQ: SPLS)

5.2%

Ford

(NYSE: F)

4.8%

Pitney Bowes

(NYSE: PBI)

4.8%

Entergy Corp.

(NYSE: ETR)

4.8%

FirstEnergy

(NYSE: FE)

4.6%

AT&T

(NYSE: T)

4.6%

Data sources: Finviz

Is the payout sustainable?

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Most dividend investors know that a key metric for any dividend stock is the payout ratio, which isthe percentage of a company's earnings that it uses to pay dividends. In general, a payout ratio over 85% is worrisome as it hints that the dividend could be on the chopping block if the company's earnings ever take a hit. A payout ratio greater than 100% means that the company is paying out more in dividends than it generates in net income.

Here's a look at the current payout ratio for each of these companies.

Company

Payout ratio

Frontier Communications

N/A

CenturyLink

127%

Seagate Technology

200%

Mattel

144%

Staples

54%

Ford

33%

Pitney Bowes

56%

Entergy Corp.

48%

FirstEnergy

51%

AT&T

82%

Data sources: Yahoo! finance

Right away we can see that this metric removes several companies from contention. Frontier Communications isn't expected to be profitable this year, which is why it doesn't even have a payout ratio. That makes it an easy pass in my book.

CenturyLink, Seagate Technology, and Mattel all boast payout ratios well over 100%, which means their dividend payments currently exceeds their net income. That lets us remove them from consideration, too.

Just like that, our list of 10 has been cut down do 6.

Is the business growing?

The remaining companies all appear to offer up stable dividend payments, but even dividend investors also need to think about growth. After all, if a company's profits are stagnant or declining, its dividend isn't likely to be increased over time, making it a far less attractive investment.

Let's take a look at the projected profit growth rates of our remaining list of companies to see what analysts believe is going to happen over the next five years.

Company

Estimated 5 year growth rates

Staples

1.3%

Ford

1.5%

Pitney Bowes

4%

Entergy Corp.

(8.2%)

FirstEnergy

(5.1%)

AT&T

8.4%

Data sources: finviz.

While Entergy and FirstEnergy are profitable and paying out solid dividends, Wall Street believes that both of these companies are about to see their profits head in the wrong direction. Those numbers tell me that we should look elsewhere for investment opportunities.

Staples is another company that should give investors pause. The company's business model is under attack from e-commerce companies like Amazon.com,which is a big reason why same store sales numbers have been in decline. To fight back, the company is closing down itsunder-performing stores and investingheavily in Staples.com, but those moves are going to take their toll on the company's profitability.

The markets also appear to be quite concerned with Ford's long-term prospects. That's likely owing to worries aboutpeakingauto sales in North America -- a theory which, if true,suggest that the company's sales and profit margins are currentlyunsustainable. In addition, autonomous vehicles and ride-sharing services are both long-termopportunitiesand threats to the auto industry. Given those realities,it's not hard to understand why analysts are being cautions with their growth estimates.

For these reasons, conservative investors might want to consider removing both Ford and Staples from contention, too.

And then there were two

Pitney Bowes sailed through our first two tests with ease, but that doesn't mean that this is a risk-free stock. In fact, the markets have been punishing shareholders for more than two years as the company has been struggling with growth. Last quarter the company's earnings fell by more than 22% due tolower-than-expected license revenue, which is one of the company's most lucrative business lines. That caused the company to reign in its full year profit forecast. That's a troubling development that could suggest that analysts are over estimating this company's growth prospects.

AT&T, on the other hand, has a lot going for it. The company's wireless division continues to be a cash cow that is supporting by very low churn rates. AT&T also offers investors the potential for growth thanks to its recent purchase of DirecTV. Its pending merger with Time Warner could also be a big win for shareholders if it goes through.. Even if the deal falls through, AT&T should still be able to crank out consistent earnings growth, allowing it to retain its status as a dividend aristocrat.

So there you have it. This simple list of criteria shows that income investors would be wise to add AT&T to their watch list and largely ignore the rest.

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Brian Feroldi owns shares of Amazon.com. The Motley Fool owns shares of and recommends Amazon.com and Ford. The Motley Fool recommends Time Warner. 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.