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 ultra-low yield environment. But many investors don’t realize how much risk is inherent in most of the highest paying dividend stocks.
The highest dividend stocks in the market are usually yielding so much because they’re very high risk—many of the energy stocks that offered double-digit yields at some time have since reduced or eliminated their dividends, for example. Others simply delivered investors staggering capital losses—an 11% yield is great but doesn’t make up for a 70% loss.
But do high yields always mean higher risk?
High-Dividend Blue-Chip Stocks
Many investors who want yield without (too much) risk have successfully found it using high dividend blue-chip stocks. 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. And the stock almost never pulls back more than 15%, even during the market’s worst corrections. It’s currently down only 4% YTD, while the S&P 500 is down over 12% (the benefit of selling a highly addictive product).
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 8.5%). The stock is less volatile than many REITs, but these REITs can be sensitive to interest rate expectations, which bears watching given the Fed’s current posturing.
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.
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.
How do you find the highest-paying dividend stocks?
This article was originally published on November 3, 2016 and is periodically updated.