Investing

Can You Still Trust Stocks With 10% Dividend Yields?

Jon C. Ogg

Investors love dividends. While a stock buyback plan is one method of returning capital to shareholders, companies paying high dividends have to take almost any measure possible to keep paying the same dividend through time. When a company pays a big dividend, it attracts investors with a high payout — often as a compensation for the risk they are taking. So, 24/7 Wall St. wants to know if investors can still feel safe in the few 10% dividend yields that exist among the mid-cap and large-cap stocks.

What has taken place is that the recent sell-off created carnage, only to find that carnage disappear almost instantly. We even offered a What sell-off? post to highlight just how much the stock market recovered. Here we tried to stick with companies that are either U.S.-based or that investors at least think of them as American, even if they are domiciled elsewhere.

In our review, we have set a base market cap screen of $2 billion in order to avoid the myriad of issues with small cap stocks. We have also set a baseline screen of 10% in order to see what the high-yield segment is really doing in the super-high dividends. Due to some of these being partnerships and other operating entities structured differently from traditional companies, you may see the term “yield” used on the payouts, even though some of these payouts may include a return of capital component. The effort remains the same — to determine how safe these payouts are.

Some of these featured companies are in business development, master limited partnerships (MLPs), drilling and exploration and real estate investment trusts (REITs). We have also included earnings per share (EPS) expectations to show how this compares to the payouts. It turns out that some of these companies may be able to keep their high payouts without much trouble.

ALSO READ: The 10 Safest High-Yield Dividends

Something must be obvious here in that these high dividends do not come without risk. The underlying securities can be very volatile in mega-high-yield stocks, and they certainly do not fit suitability tests for “widows and orphans funds.” That being said, some of these dividends and payouts could be at risk, but others may be able to keep their payouts in 2015 and beyond. Stay tuned.

SeaDrill

Cratering oil prices have been taken down shares of exploration and drilling company SeaDrill Ltd. (NYSE: SDRL) from almost $40 in June and July down to $22 and $23 of late. The $1.00 quarterly dividend has been in place for two quarters, and the payout history has been very volatile. That being said, earnings are due at the end of November, and we may have to wait until then to see what the payout will be.

SeaDrill’s guilt here is the same as most others in its field, and that is $80 oil. Nomura downgraded SeaDrill in mid-May with its view of a likely dividend cut in half. Thomson Reuters has annual estimates of $2.98 EPS for 2014 and $3.24 EPS for 2015. That means that a $4.00 annualized payout would be more than the company is making. In addition, fresh news of the sale of the West Vela broke on Tuesday.

Annaly Capital Management

While Annaly Capital Management Inc. (NYSE: NLY) may not have the absolute highest yield of all mortgage REITS, it does have a whopping $10.8 billion market cap. Many investors consider this the best in class with the best management and investment team on the street. That being said, rising interest rates, whenever they finally come, pose a threat to this class. Limitations of the mortgage market have also been a risk for the sector.

Annaly Capital currently screens out with a dividend yield of 10.5%, based on a $1.20 annualized payout. Thomson Reuters has estimates of $1.16 EPS in 2014 and $1.26 EPS in 2015. Another wild card could be that the Federal Reserve has signaled the end of quantitative easing, and that means its purchases of Treasuries and mortgage-backed securities.

ALSO READ: 9 High-Yield Dividends for Risk-Takers