Can These 5 Companies Keep Paying Huge Dividends?

Includes: CIM, FTR, NLY, NOK, ORAN
by: Dividend Kings

Investors are always searching for the highest return possible on their investment dollars. One way is to search for companies with nice dividends payable on their stock. Some stocks carry monster dividend yields compared to other stocks and investment choices. Let’s look at a few of these monster yields to see if they’re worth the risk.

Frontier Communications Corp. (NYSE:FTR) has reached another 52 week low of $4.84 and closed just above it at $4.87. It is now 50% under the 52-week high of $9.84. The company currently has a forward annual dividend of 75 cents, resulting in a yield of 15.4%.

The company nearly tripled revenue in 2010 after purchasing nearly five million landlines from Verizon Communications Inc. (NYSE:VZ). Though that purchase temporarily stopped the trend of declining revenues, the general view is that this was not a good move on Frontier’s part. Since then Frontier’s revenue decline has continued, especially those increasing obsolete landlines. On the bright side, it has focused on increasing sales of broadband to its now far larger customer base.

Frontier needs to increase its wireless business to better compete with the much larger CenturyLink, Inc. (NYSE:CTL). CTL is currently considered the leading candidate to buy Sprint Nextel Corp. (NYSE:S). In the meantime, Frontier’s financials compare fairly favorably to CTL. Frontier’s operating margin of 19.47% matches CTL’s 19.34%, though current profit margins of 2.88% for Frontier's are barely half of CTL’s 5.56%.

There is a perception that the dividend is not sustainable at the current rate. Nevertheless, management has committed to maintaining the dividend. This stock may not be for the faint of heart. Buy Frontier at these levels for both dividend yield and potential for price appreciation.

Nokia Corporation (NYSE:NOK), at just over $5 a share, has also fallen near its 52 week low of $4.82. This is nearly 60% below the 52 week high of $11.75. The stock currently has a forward annual dividend of 57 cents, giving it a yield of 11.4%.

The company is working its way back into the U.S. smartphone market with an entry-level phone for T-Mobile, a subsidiary of Deutsche Telekom (DT). Its Windows phones, the first of its kind for Nokia, is based upon a partnership with Microsoft Corporation (NASDAQ:MSFT) and will launch in January 2012. Along with this new partnership, there is already speculation that Nokia might actually sell off its entire cell phone manufacturing business to Microsoft sometime in 2012.

Nokia has recently fared better than competitors, like Motorola Mobility Holdings, Inc. (NYSE:MMI), in the income generation department. Nokia had a net income of $860 million for the most recent quarter compared to Motorola’s $89 million loss. Operating margins for Nokia were tiny at 2.50% but still better than Motorola’s 0.49%. As a worldwide operation, Nokia may be better positioned to ride out economic ups and downs that might affect the dividend payouts of other, strictly domestic companies. Buy the stock here for a nice dividend yield and potential price appreciation as well.

Annaly Capital Management Inc (NYSE:NLY), at its current price around $16.20 a share, is in the midpoint of a narrow trading range between $14.05 and $18.79 that has held for the past year. With a current forward dividend of $2.40, the stock has a nice yield of 14.8%.

The company has been considered one of the premier Real Estate Investment Trusts (REITs) since its creation in 1997, and has virtually the same management team still in place. Despite a difficult real estate environment and flattening of interest rates, it has managed to maintain more than enough cash flow to support the dividend. At the same time, a continued flat housing market, higher prepayment of mortgages and an inquiry by the Securities and Exchange Commission into the tax status of NLY, Capstead Mortgage Corp. (NYSE:CMO) and other similar mortgage based REITS could signal a rougher road ahead.

Despite being a much larger company, Annaly trails Capstead in overall operating profitability. The company’s operating margin of 84.07% trails Capstead’s 90.49%, and Capstead’s profit margin of 90.37% handily beats Annaly’s 80.62%. Annaly’s total cash of $4.89 billion in most recent quarter is dwarfed by the $11.77 billion cash hoard held by CMO. Nevertheless, stable and stellar management combined with a great yield makes NLY a buy at these levels and on any dips.

Chimera Investment Corporation (NYSE:CIM), at a current price around $2.68, is another stock trading near its 52 week low of $2.38 and 45% below the 52 week high of $4.36. The stock carries a forward dividend of 52 cents, giving investors willing to take a chance on it a huge current yield of 19.4%.

Since being spun off from Annaly four years ago, Chimera and competitors like MFA Financial, Inc. (NYSE:MFA) have had to deal with similar issues as Annaly: lousy housing market, greater mortgage prepayments and questions about its future tax status. However, one big difference is that Chimera, unlike Annaly, purchases mortgage investments not guaranteed by any government agency. This makes Chimera’s investments much more risky than those of Annaly, and more exposed to default by borrowers. The company also announced it has delayed filing its quarterly 10-Q due to questions over the value of some of its investment holdings.

Year over year revenue growth for Chimera has declined by 37.9% compared to an increase for MFA of 10.5%. Quarterly earnings growth for MFA has been 8.4% versus a decline of 43.3% for Chimera. This is one reason why CIM’s dividend has been cut three of the past four quarters. Because of the unstable dividend and greater risk exposure to borrowers, avoid Chimera in favor of other REITs with smaller but more stable dividends.

France Telecom S.A. (FTE), at a current price around $15.50 a share, trades near its 52 week low of $15.16 and about 34% of its 52 week high of $23.70. With a current forward annual dividend of $1.37, it carries a yield of 8.5%.

France Telecom and other European competitors like Vodafone Group plc (NASDAQ:VOD) face some major headwinds going into 2012. On the bright side, business and market share seems to be stabilizing in each country France Telecom operates in (France being the largest). Cash flow also seems more than enough to cover the dividend. The downsize for France Telecom is the sovereign debt crisis and the effect on all of Europe. For now France Telecom still carries a respectable operating margin of 17.68% compared to 14.49% for Vodafone. However, Vodafone’s current 15.18% profit margin is more than double the 6.75% of FTE.

Both companies have experienced year over year earnings declines, France Telecom much more so than VOD. If not reversed this would also affect France Telecom’s ability to maintain the dividend. Given the euro/dollar currency exchange risk and uncertainty over Europe’s debt crisis, avoid France Telecom in favor of domestic companies with similar or greater dividend yields.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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