In recent years, high-paying dividend stocks have become incredibly popular with retired investors—and young baby boomers too. Adding a few of the market’s highest-paying dividend stocks to your portfolio can be a huge help in generating regular income in today’s uncertain environment. But many investors don’t realize how much risk is inherent in many of the highest-paying dividend stocks.
The highest dividend stocks in the market are usually yielding so much because they’re very high risk. Similarly to bonds, a stock perceived as risky and perhaps likely to cut a dividend commands a higher dividend yield than a stable stock with strong cash flow.
But do high yields always mean higher risk?
[text_ad]
High-Dividend Blue-Chip Stocks
Many investors who want yield without (too much) risk have successfully found it using high-dividend blue-chip stocks like telecoms AT&T (T) and Verizon (VZ). Utilities are some of the highest-paying dividend stocks, but most are very low risk, such as Southern Company (SO), the electric utility for much of the Southeastern U.S.
Some non-cyclical consumer stocks also offer consistency and high dividends. Philip Morris International’s (PM) high quarterly dividend, for example.
The Highest-Paying Dividend Stocks: REITs and MLPs
Other investors in search of yield turn to some of the highest-paying dividend stocks in the market: Real Estate Investment Trusts (REITs) and master limited partnerships (MLPs). These special types of income investments are designed to consistently pay higher-than-average dividends. So while a 7% yield from an “ordinary” stock is usually a red flag, yields that high can be perfectly normal and sustainable for one of these high-yield vehicles.
For example, Starwood Property Trust, Inc. (STWD) is a REIT that finances residential and commercial real estate (and currently yields 11.6%). The stock is less volatile than many REITs, but these REITs can be sensitive to interest rate expectations, which bears watching.
I still advise avoiding the very highest-yielding dividend stocks from these income-oriented categories, since outliers are more often than not outlying for a reason. In addition, some investors find the tax complications of owning REITs and MLPs more trouble than they’re worth.
Hidden Gems
Lastly, there’s one group of the highest-paying dividend stocks that income investors often overlook: turnaround stocks. Turnaround situations can be a great way to find relatively low-risk, high-paying dividend stocks—and they’re usually a great value to boot.
The critical consideration here is that a company that’s in the midst of a turnaround may look to cut dividend payments to help facilitate the turnaround, so it’s important to look for signs that the turnaround is well underway.
That said, it’s worth keeping in mind that many turnaround stocks have already seen their share prices fall as the company has struggled, identified areas of improvement, and gone through the difficult process of elevating the prospects of both the company and the shareholders.
To learn more about the highest paying dividend stocks I’m recommending now (including a turnaround play that’s a recent addition), subscribe to Cabot Dividend Investor today.
[author_ad]
*This article is periodically updated to reflect market conditions.
