As we all know there are a plethora of investing strategies which can be implemented to get abnormally high current income. And there surely are market participants, whose main objective is to get substantial current income stream and hence who are taking positions only from the “what provides the highest yield” perspective.
Given the fact that the overall pessimism levels in the global economy are increasing and interest rates have finally started to rise, highly levered companies (which is very common among high yielders) are becoming much riskier than we have used to.
To see how these high-yielding stocks have performed in 2018, I have filtered 20 highest yielding U.S. common stocks by their 5-Y average dividend yield. Compared to just filtering by current dividend yield, 5-Y average allows me to exclude companies, which have paid unusually large dividends.
Source: Author, Investing.com
The average 5-Y dividend yield of 14.61% is indeed impressive and the current yield of 13.06% is also a noteworthy number. In order to measure the performance of this kind of shares, it is important to account for the dividends received. So, by looking at the total return where all the received dividends are reinvested, 8 companies have shown a positive return in 2018. The average return of all 20 is -3.4%.
Compared to the total return of SP500, these 20 high-yielders have performed better by 1.86% in 2018.
However, only 5 of the analyzed stocks have positive 5-Y EPS growth (average for all 20 is negative 6.23%), while the SP500 has enjoyed a significant EPS growth and is currently trading at TTM EPS growth of 17.75%. In addition, the dividend growth rate for 19 firms is negative and the average payout ratio among all 20 companies is 86%. These metrics send a clear signal that the probability of positive future growth (e.g. increased dividends) is rather low. One should even expect lower income streams from these companies mainly due to the negative EPS trends.
As outlined before, companies which have above-average dividend yield tend to be highly leveraged. Using most recent quarterly reports, the mean debt to equity ratio for these 20 firms is 1.36. This means that their long-term debt exceeds the equity value by 36%. Considering the looming economic slowdown and the increasing interest rate environment, one should be extra cautious and exercise extra prudence in opening considerable positions in these shares.
The bottom line
While the top 20 highest-yielding stocks (by 5-Y average dividend yield) have outperformed SP500, there are some severe risk factors embedded in them. Negative EPS growth, high payout ratio, and high leverage leave small hope of somewhat positive performance going forward. Moreover, already negative dividend growth coupled with increasing interest rates give a sign that dividend income could shrink in the future. In summary, one should avoid putting large chunks of his or her money in this strategy.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.