Income investors love high dividend yielding stocks, and companies like Mattel (NASDAQ: MAT), Kohl's (NYSE: KSS), and Welltower (NYSE: HCN) have some of the highest dividend yields in the market. Yet rather than just going out and purchasing shares of the top 10 dividend yielding stocks that you'll find below, you need to consider whether those stocks are likely to stay on the list in the months and years to come.
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The top 10 yields in the S&P 500
Below, you'll find the 10 highest-yielding stocks in the S&P 500 as of March 8:
Data source: Yahoo! Finance.
When you consider what this list looked like just a few short months ago, the most obvious change is the dramatic increase in the yield of Frontier Communications. Shares of the telecommunications company have fallen in light of ongoing challenges with its integration of wireline acquisitions in California, Texas, and Florida, and investors are increasingly nervous about Frontier's ability to grow as quickly as they had previously thought. Yet the company remains committed to its current dividend, and so the share-price decline has boosted the yield despite no change in the underlying dividend payment.
Dealing with retail woes
The best-represented sector on the S&P 500 high dividend yield list is retail, and a lot of the stocks that show up here have faced major difficulties. In the office supply space, Staples failed to gain approval for its merger with remaining rival Office Depot, and that left the company vulnerable to competition from online-only retailers and the cost advantages that they enjoy. Despite suffering losses, Staples continues to make its dividend payouts, and investors are hopeful that the company can sustain its current payout level for the foreseeable future.
Image source: Getty Images.
Meanwhile, department store retailers are also paying attractive yields. Both Kohl's and Macy's have announced substantial numbers of store closings in recent years, with closures coming in several waves for many department store chains. Yet even with the cost-cutting moves, holiday results for Macy's and Kohl's this past year were particularly weak, and there's no sign of any imminent bounce for the department stores going forward. As with Staples, online competition is eating into the business of mall-based retail giants, and even the lure of a more tactile shopping experience hasn't been enough to drive traffic. In the long run, companies won't be able to sustain their dividend payouts if they can't reach some viable level of operations that produces sufficient sales and ample profit.
Other high-yielding stocks
Outside retail, the other stocks listed above have had mixed performance. For Mattel, terrible fourth-quarter performance sent the stock down 20%, and that lifted the yield to its current level above 6%. Some fear that an earnings shortfall suggests an imminent dividend cut. Ford's situation is less dire, as only a large pension-related charge was responsible for recent losses that hid strong fundamental performance throughout much of the automaker's business.
On the other hand, Iron Mountain has paid an impressive dividend for a while, with a strong portfolio of properties that provide specialized storage services. Iron Mountain's specialty is information protection and records management, and it has done a good job of leading that niche market. Similarly, Seagate Technology has recently seen its shares recover in light of improving price conditions in the memory market and a resurgence of interest in storage to assist with data analytics and cloud computing applications.
Will mergers solve problems?
Consolidation is one area in which some companies find ways to remedy their financial issues. It isn't always successful, but sometimes it can create economies of scale that are beneficial.
For instance, late last year, CenturyLink said it would combine with Level 3 Communications (NYSE: LVLT) in a transaction valued at $34 billion. The companies anticipated that the deal would produce annual synergies of about $975 million, and CenturyLink said it expected to maintain its current dividend rate even after the deal was complete. Indeed, if the merger is accretive to free cash flow within the first year following closing -- as CenturyLink expects -- then it could make it easier for the telecom giant to sustain dividends going forward.
For senior healthcare-oriented real estate investment trust Welltower, acquisitions have been essential to drive growth. With moves like its purchase of a $1.15 billion senior housing portfolio from Vintage Senior Living late last year, Welltower hopes gradually to build up its size and keep generating the income it needs in order to fund its distributions.
Overall, the companies that appear on this list of highest-yielding dividend stocks have their share of obstacles to overcome before they can eliminate the risks they face. As long as you go forward knowing the risks involved, the decision is yours whether the rewards outweigh the risks in adding these and similar stocks to your portfolio.
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