If you're in the market for dividend-paying stocks, you're onto a smart investing strategy. That's because shares of healthy and growing dividend-paying companies are likely to rise in value over time, and their dividend payouts will tend to do the same.
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Check out the data below, adapted from a Hartford Funds report:
|
Dividend-Paying Status |
Average Annual Total Return, 1973-2023 |
|---|---|
|
Dividend growers and initiators |
10.19% |
|
Dividend payers |
9.17% |
|
No change in dividend policy |
6.74% |
|
Dividend nonpayers |
4.27% |
|
Dividend shrinkers and eliminators |
(0.63%) |
|
Equal-weighted S&P 500 index |
7.72% |
Data source: Ned Davis Research and Hartford Funds.
See? It's hard to beat dividend payers.
But all dividend payers are not alike. Some have rosy futures, and others are destined for the dustbin. Many investors look for the biggest dividend yields, but you might not want to do that. Here's why, via a look at some of the highest dividend yields in the Nasdaq stock market.
What's wrong with fat dividend yields?
A fat dividend yield isn't necessarily bad, but you should treat it as a red (or at least pink) flag worth investigating more closely. That's because it's often the result of a stock having cratered -- often for good reason.
Remember that to arrive at a dividend yield, you take the stock's annual dividend (you may need to multiply its current quarterly payout by four) and divide it by the stock's current price. So if TKTK Co. is trading at $100 per share and pays out $1 per quarter, you would multiply $1 by four, arriving at an annual dividend of $4, and then divide that by $100, getting 0.04, or 4%. That's the dividend yield.
Now imagine that TKTK has fallen in price to $50 per share. To arrive at its new dividend yield, you divide $4 by $50, arriving at 0.08, or 8%. See? It suddenly has a much higher dividend yield. And if it's high because the company is in trouble, a dividend cut or suspension might be in the offing.
High dividends in the Nasdaq
Here are three companies with some of the fattest dividend yields in the Nasdaq stock market.
1. AGNC Investment
AGNC Investment (NASDAQ: AGNC) recently sported a dividend yield of 15%. That's certainly tempting, but read on. The company is a real estate investment trust (REIT), but it's not the usual kind of REIT that buys up lots of real estate and then leases it out. Instead, it's another kind of REIT, one that invests in mortgage-backed securities.
Often referred to as mREITs, these businesses originate and/or purchase mortgages or securities based on mortgages. They focus on real estate financing, not on real estate itself. Mortgage REITs face risks from changing interest rates, borrowers prepaying or refinancing their loans, borrowers defaulting on loans, and so on.
As tempting as AGNC Investment might seem, a closer look reveals that its payouts and stock price have been falling. In short, the company is not designed to be an income generator.
2. Icahn Enterprises
You might also be drawn to Icahn Enterprises (NASDAQ: IEP) due to its dividend, which recently yielded 19.8%. (Yes, you read that right.) It's named for the billionaire (and activist investor) Carl Icahn -- who's now 88 and who recently owned more than 85% of the company.
But this is not a stock that's likely to reward you with generous income over many years. For one thing, it's not a regular common stock. The company is organized as a master limited partnership (MLP), which can make things complicated when it comes to taxes. For example, MLPs issue yearly K-1 schedules, which need to be incorporated in your tax return.
Some MLPs seem quite promising, but Icahn Enterprises is not one of them. As my colleague Anders Bylund has pointed out, the company has been taking on a lot of risk and not performing particularly well lately. In fact, in 2023, Hindenburg Research argued that Icahn Enterprises can't support its payout. Whether they're true or not, such claims are not reassuring.
3. Walgreens Boots Alliance
Finally, there's Walgreens Boots Alliance (NASDAQ: WBA), which recently yielded a hefty 9.6%. This fat yield is a classic example of a high yield caused by a falling share price. A look at Walgreens' stock chart shows just that. And the quarterly payout of $0.25 per share is just over half of what it was in 2023.
Shrinking dividends are generally tied to struggling companies, and Walgreens is struggling, posting losses, closing locations, and trying to get its act together, in part via a new chief executive officer, Tim Wentworth.
Whenever you encounter a tantalizing dividend yield, be sure to research the company thoroughly, to make sure it's not in trouble.
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Selena Maranjian has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
