Today'spersistently low-interest-rate environment has forced many investors to put money in the stock market in an effort to generate yield. Naturally, many of these investors are simply searching for the highest dividend-yielding stocks that they can find in order to maximize their income. However, not every high-yield stock is worthowning, so these investors need to be choosy about which companies they choose to buy.
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With that in mind, here's a look at the10 highest-yielding stocks from the S&P 500. Let's put these companies to the test to see if any could actually be worthy of an investment.
This table excludes REITs. Data sources: Finviz.
Test No. 1 -- The payout ratio
Smart dividend investors know that they need to check a company's payout ratio before making a purchase. This metric is calculated by dividing a company's annualdividend payment by its trailing 12-month earnings. A payout ratio greater than 100% means that the company is paying out more in dividends than it generates in net income, which is a worrisome sign.
Here's a look at the current payout ratio for each of these companies.
Data sources: Authors calculation.Yahoo! finance.
Using this data, we can immediately remove several companies from contention. Both Frontier Communications and Occidental Petroleum recorded a net loss over the past year, which is why neither sports a payout ratio. Investors should consider skipping them entirely.
Meanwhile, CenturyLink, Mattel, and Seagate Technology all have payout ratios that exceed 100%. That hints that their dividends will not be sustainable in the long term unless something changes. I think investors should give these businesses a pass, too.
Let's subject the remaining five companies to another simple test to whittle down the list a bit further.
Test No. 2 -- Growth
The next metric that I think investors should look at is growth. After all, companies with declining profits are unlikely to be able to grow their dividends over time, which makes the company a much less attractive investment.
While these metrics are far from perfect, I like to look at a company's earnings-per-share (EPS) growth over the past five years and its estimated future growth rate to get a sense of what market watchers expect to happen.
Here's what those numbers look like:
Data sources: Finviz.
The past half-decade has not been very prosperous for Pitney Bowes' bottom line. The advancement of new communication methods and increasing competition from companies like Stamps.comhave slowly erodedthe company's competitive advantage. While management is investing in new software in an effort to better compete, market watchers are expecting profit growth to be meager.
Staples is another company facing growth challenges. Competitive pressures from e-commerce companies have been driving away demand for the company's brick-and-mortar stores. In response, the company is closing stores and investing in its own online channels, but these actions are expected to keep profit growth in check.
Finally, analysts are not feeling all that bullish about Ford's long-term profit growth, either. Those worries likely stem from concerns that North American auto sales are nearing theirpeak, which hints that the company's top- and bottom-lines could stall. Mix in the lingering competitive threat from companies like Tesla and the uncertainty surrounding autonomous vehicles and ride-sharing services, and it's easy to understand why market watchers are feelingcautious.
Given these three businesses' tepid growth prospects, I think it's a good idea to remove them from consideration, as well.
Worthy of a closer look
Kohl's offers investors a well-covered dividend and the potential for high single-digit EPS growth, which is an attractive combination. However, it's no secret thatbig-box retailers have been under a lot of pressure in recent years due to the ever-changing consumer landscape.
In response, Kohl's is adapting by closing stores, working to lower its cost structure, and returning its ample profits to shareholders in the form of a dividend and share repurchases. Those decisions will likely cause its top line to slowly decline, but its bottom line should still be able to march higher. If the plan works, then it could turn Kohl's into a decent investment, especially from today's depressed share price.
Telecom giant AT&T also offers investors reasons for optimism. While the wireless market in the U.S. is mature, AT&T's massive user base should ensure that it cranks out copious amounts of cash flow for years to come. Meanwhile, the company's recent acquisition of DirecTV offers investors a decent shot at seeing bottom-line growth.
The company'spending merger with Time Warner could also provide long-term upside if the deal gets the thumbs up from regulators. All in all, AT&T's investors stand a great chance of earning a huge yield while they wait for the company's growth strategy to play out.
While Kohl's and AT&T are far from risk free, they both offer investors a sustainable dividend payment and a decent shot at earnings growth. That makes me think that these two stocks are worth a closer look if a big yield is what you seek.
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