As the saying goes, once you hit the top, there's nowhere to go but down. That's especially true for companies making it to the list of the top five highest-yielding stocks in the S&P 500.
Consider the following: Over the last year or so, Frontier Communications (FTR), RadioShack (RSH), and CenturyLink (CTL) all spent time on the list. And, lo and behold, their dividends got slashed and share prices cratered. Pitney Bowes (PBI) is the latest company to join the ranks of these dividend disappointers. On Tuesday, management announced that first-quarter earnings sank 57%, and they were cutting the dividend in half -- from $0.375 per quarter to $0.1875.
As Chief Executive Marc Lautenbach said, "This action will provide us the added financial flexibility to invest in the business and enhance our capital structure, while continuing to provide a very competitive return to shareholders." Sure. Good luck keeping shareholders. (By the way, share prices already plummeted more than 15% on the news.)
That's the thing about chasing yield. The downside risk far outweighs the additional income you might receive. Is the potential for a 9% yield in Pitney -- which the company sported at the end of last week -- worth suffering a 15% loss of principal this week? I didn't think so.
But for some investors, the temptation of double-digit yields is too hard to resist. And that's exactly why I'm writing this article.
The Kiss of Death for Dividend Stocks
For the record, I warned investors about Pitney before, along with the other three stocks above. (See here, here, and here.) Yet I'm sure some of you ignored those warnings. Again, double-digit yields are tough to pass up, especially in our current income-starved environment.
But today, I'm issuing another warning to never buy any of the top highest-yielding stocks in the S&P 500 Index -- no matter how desperate for yield you become. You see, companies never make it onto the list because of their overly generous dividend increases. Instead, their sky-high yields come as a result of struggling underlying businesses and, in turn, floundering stock prices.
If you have any doubt, take a look at the current crop of top-yielders:
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Every last one is operating a business that's facing some serious headwinds, if not complete obsolescence. (I'm looking at you, Garmin (GRMN).) Heck, two previous dividend cutters are still on the list, indicating that their share prices continue to take a pounding.
The most dangerous stock of them all, though, appears to be Windstream (WIN). It sports an unbelievably high trailing 12 months dividend payout ratio, according to Morningstar. Simply put, that means it's paying out way more money in dividends than it's earning. And that's just not sustainable.
Bottom line: Earning a spot on the list of the top five highest-yielding stocks in the S&P 500 Index isn't a call to action for income-starved investors. It's the kiss of death. Trust me, in this case, abstinence is the best policy.