The average stock on the S&P 500 pays a dividend yield of just under 2% as of May 2017, which is not exactly a thrilling payout for most income-seeking investors. However, there are some stocks on the index that have much higher dividends. Let's look at the 10 highest-paying stocks on the S&P 500 and see whether any of them are worth buying.
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Table is author's own. Share prices and dividend yields current as of May 1, 2017.
You should be wary of some of these stocks
There are certainly some stocks on this list whose dividends are too good to be true. The top payer, telecom company CenturyLink (NYSE: CTL), is a prime example.
A stock's payout ratio tells us how much of the company's earnings are being paid out as dividends. Lower is better, and a payout ratio in excess of 100% implies that the company is paying out more than it makes, and therefore the dividend might be unsustainable.
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Well, CenturyLink pays dividends at a rate of $2.16 per year, but analysts are only calling for earnings of $2.16 in 2017 -- which means the company's payout ratio is forecast to be exactly 100%. What's more, earnings are expected to drop to $2.09 next year. This is a little too high for comfort.
Mattel (NASDAQ: MAT) looks even worse from a dividend safety standpoint. The company pays out $1.52 annually, but earned just $1.06 per share in 2016, for a sky-high payout ratio of 143%. Mattel also reported disappointing first-quarter results, and I wouldn't be surprised to see a dividend cut in the not-too-distant future.
There are some good choices on this list
Before you get discouraged, I'll say that the majority of the dividend stocks on this list have pretty safe payouts. In fact, there are some that I'd call excellent long-term investments.
Specifically, I love the two real estate investment trusts (REITs) on the list, Iron Mountain (NYSE: IRM) and Kimco Realty (NYSE: KIM), and I actually own the former in my portfolio. By definition, REITs are supposed to pay out a high percentage of their earnings to maintain their tax benefits, so it's only natural that a couple of REITs made the top 10.
Iron Mountain is a leader in records storage and security, and you can read my thorough discussion of why I like the company as a long-term investment here. Kimco is a retail REIT that specializes in shopping center properties anchored by defensive retail tenants such as TJX Companies, Wal-Mart, and Dollar Tree, and it has a fantastic track record of delivering market-beating performance and strong dividend growth.
To name a couple more, Ford (NYSE: F) trades at an incredibly cheap valuation of just 7.4 times forward earnings, which are expected to cover the company's dividend more than 2.5 times over. Most analysts are expecting automaker earnings to fall significantly in the coming years, but Ford's low payout ratio should provide protection from a drop in profits. And Verizon (NYSE: VZ) and AT&T (NYSE: T) are excellent income investments with consistent earnings and low volatility.
The Foolish bottom line
A high dividend all by itself isn't necessarily a good or bad thing. As we've seen, some of the stocks on this list don't even earn enough money to cover their dividend payments, while others earn more than enough to sustain their payouts and reward shareholders for years to come.
The bottom line is that any dividend is only as strong as the company paying it, so be sure to do a little digging before diving in to any of these high-dividend S&P 500 stocks.
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