Are All of the Highest Paying Dividend Stocks High Risk?

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 in the last year 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?

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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), for example, both yield right around 5%, but also trade at a beta of less than 1 (meaning they’re less volatile than the overall market). Utilities are some of the highest paying dividend stocks, but most are very low risk. Southern Company (SO), the electric utility for much of the Southeastern U.S., yields 4.8% and trades at a beta of 0.03.

Some non-cyclical consumer stocks also offer consistency and high dividends. Philip Morris International’s (PM) high quarterly dividend of $1.04 yields 3.6% at current prices, and the stock almost never pulls back more than 15%, even during the market’s worst corrections (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, CoreCivic, Inc. (CXW) (formerly Corrections Corp. of America) is a REIT that operates for-profit prisons. The company has paid dividends since 2012, and CXW’s current quarterly dividend of 42 cents offers investors an unusually high yield of 6.8% at current prices. The stock is less volatile than many REITs but does tend to be sensitive to interest rate expectations, prompting big declines in advance of the last two rate hikes.

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 high 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 highest paying dividend stocks in the portfolio of my premium advisory, Cabot Dividend Investor, are all turnaround situations today.

To find out my favorite stock of the bunch  and to get my proprietary IRIS Dividend Safety and Growth ratings for the stock, just click here.

Timothy Lutts

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This article was originally published on November 3, 2016 and is periodically updated.

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