Investors' mouths water over fat, juicy dividend yields. The problem with picking individual stocks with enormous yields is that many are priced that way because they are unsustainable. Either the payout ratio is too high, earnings too low or both. If something sounds like it's too good to be true it probably is.
Still, there's something about 10%+ dividend yields that appeals to the speculator in all of us.
"If I can just hold on, the stock pays for itself in under 10 years", I hear people rationalize. "Perhaps the dividend is maintained; perhaps earnings grow; perhaps the stock price normalizes".
In reality, investors must approach high yield stocks with caution. No investor has a crystal ball, so if an investor wishes to access high risk equity income it is important to diversify across a range of high yielding companies with reasonable valuations and business strength.
I ran a screen just for this purpose. Using the data available to me (source), below is a list of six stocks that fit the following criteria:
· 10%+ dividend yields - for mouthwatering distribution appeal
· Payout ratios under 80% - to help identify potentially repeatable dividends
· P/E ratios under 10x - to provide a possible cushion below the stock price
· Net profit margin over 10% - to indicate that the business may be somewhat viable
Let's be straight here - not all these names are going to meet the 'most-admired corporations' list. But that's the territory into which you must venture if you're searching for unusually high yields. Again, if you're going to get involved with risky dividends, diversification is your friend - and don't invest more than you can afford to lose.
Remember, this screen is just a starting point from which to conduct further research (all US-listed stocks):
Capital Product Partners L.P.
Newcastle Investment Corp.
PennyMac Mortgage Investment Trust
Prospect Capital Corporation
Torch Energy Royalty Trust
These stocks provide an average dividend yield of 16.19% and all have a payout ratio below 80% of earnings:
While all six stocks have a trailing P/E ratio under 10x earnings, one must consider other valuation metrics - forward P/E, P/S, P/B, P/Cash - to validate what the P/E ratio is suggesting:
Finally, as mentioned above, all these stocks have profit margins above 10%. Except for CPLP, NCT and possibly PSEC it appears that the P/E ratios are fairly representative.
|Ticker||Return on Assets||Operating Margin||Profit Margin|
This is a simple screen - I suggest readers conduct their own research into the quality of these stocks. (For example, an investor might take issue with YPF's risk of expropriation. Note: I have an immaterial position in YPF.)
Despite the best research attempts, remember that there are always unknowns. For this reason, I think that investors (even the most confident investors) entering the world of high-risk dividends should diversify their holdings and not risk more than they can afford to lose.
Additional disclosure: Data Source: Finviz.com. This is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate and should not be relied on. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing decisions.