I have identified 5 dividend stocks with monster yields of more than 5%. Our list includes one telecom stock, two energy related companies, a business services company, and a financial company. Let’s look a little closer and see if any of these stocks are worth adding to your portfolio:
Seadrill Limited (SDRL) – With a trailing price-to-earnings ratio of around 7 and a dividend yield of over 9%, SDRL looks very attractive at these levels especially compared with rivals Ensco PLC (ESV), with price-to-earnings ratio of around 16 and Noble Corp. (NE), with an even higher price-to-earnings ratio of over 27. It also has a return on equity of almost 34% and operating margins of slightly less than 40%. There aren’t too many companies with numbers as good as these; however, it has a huge debt load at $9.7 billion, which gives it a debt-to-equity ratio of over 136. For most companies this would be a problem, but if SDRL continues to grow at its current rate as discussed here, it should be able to manage that debt load. When a company has more debt than equity there is usually little margin for error, if the company faces some unknown crisis or headwind in the future the stock could get pummeled. This is not a stock for the faint of heart; I wouldn’t recommend buying it for your children’s college fund, but for those with an appetite for risk, SDRL could be a great buying opportunity at these levels.
Credit Suisse Group (CS) – Perhaps the most well known of the European financials, CS has been hammered in the recent storm and is down 36% in the last year, more than its competitor Deutsche Bank AG (DB), whose shares have fallen about 33% in the last year and UBS AG (UBS), which is down 32% over the same period. CS has a healthy dividend that currently yields 4.1% and is projected to go higher in the next year, which is a sign of financial strength and its dividend is significantly higher than that of its peers.
CS has a trailing price-to-earnings ratio that is roughly 9 and has a forward price-to-earnings ratio of less than 6, which makes the stock look fairly cheap if its earnings come in as projected. The primary concern with CS is the Greek debt situation and its exposure to it as discussed in this Seeking Alpha article. I think the European crisis is somewhat overblown and already priced into the stock. I rate CS as a long term buy at current levels.
Energy Transfer Equity, L.P. (ETE) – With a dividend yield of 7% and growing at a fairly steady clip over the past several years, ETE looks like a very attractive income play for those who seek income generating equities, but looks can be deceiving. The stock is trading at a premium to the market with a trailing price-to-earnings ratio at over 37 and projected to be around 17 next year, which is still high relative to the market. It’s possible that the stock could trade at an even higher multiple as it may get a boost from higher natural gas prices due to cooler temperatures and supply gaps, according to this article. Currently ETE trades at a premium to AmeriGas Partners L.P. (APU), which has a price-to-earnings ratio of slightly below 19 but is not projected to grow as fast over the next 5 years. There are some negative things to consider before buying shares in ETE, the payout ratio based on last year's dividends is 225%, which means it is spending more to maintain the dividend than it has earned over the last year. Unless earnings more than double from current levels it is highly likely that the dividend will have to be cut as cash reserves stand at a paltry $.68 per share and total debt at over $11 billion. I would put this stock on a wait and see list and would only be a buyer if there was a substantial pullback of 10% or more.
R.R. Donnelly & Sons Company (RRD) – RRD has a trailing price-to-earnings ratio of around 26 and is not cheap relative to the market, which has a price-to-earnings ratio of around 15, but it has a dividend yield of almost 7%, which should act as a buffer in this turbulent market and offer some downside protection. RRD has fared better in this economy than its rival Quad/Graphics, Inc. (QUAD), which lost $4.75 per share in the trailing 12 month period where RRD has turned a slight profit at $.61 per share over the same period. With a dividend payout of $1.04 annually and earnings significantly less than that, it is unlikely that it can maintain the dividend unless its projected earnings come in as discussed in this Seeking Alpha article . Then there is the fact that RRD has a less than stellar balance sheet with $4 billion in total debt giving it a debt-to-equity ratio of roughly 226. I am not sure if RRD can service its debt load and we would recommend selling this stock until it can restructure its debt to manageable levels.
Nokia Corporation ADR (NOK) – NOK has been absolutely punished as it continues to lose market share to Apple Inc. (AAPL) and Android as it is down a whopping 35% year to date. With a high dividend yield of 7.7%, the question is can the company continue to maintain that going forward. The dividend seems to be secure for the time being as NOK has a strong balance sheet with over $13 billion sitting in cash and a debt-to-equity ratio of slightly above 39. One thing that is troubling is the fact that NOK has a payout ratio of 110% based on its trailing twelve month earnings of $.46 cents per share. If earnings per share do not increase it is likely that the dividend will be cut at some point in the future. On the positive side NOK is partnering with Microsoft Corporation (MSFT) with a Windows Phone that is an attempt to take market share back from Android. More information about this can be found in this Business Insider article. Although NOK is a beaten down stock that looks cheap at current levels, it could be a value trap and I recommend only holding the stock for the time being.