Can You Still Trust Stocks With 10% Dividend Yields?

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.

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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.


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.

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Prospect Capital

Prospect Capital Corp. (NASDAQ: PSEC) has the highest yield of the larger business development companies. This segment specializes in high payouts, but those payouts can be very volatile throughout the business cycle. This one reports earnings this week on November 6. Back in September, the company already telegraphed its monthly distributions out to January: 11.0625 cents per share declared for January 2015 (record date of January 30, 2015, and payment date of February 19, 2015).

That prospective monthly distribution is to be preceded as follows: 11.0525 cents per share for September 2014, 11.0550 cents per share for October 2014, 11.0575 cents per share for November 2014 and 11.06 cents per share previously declared for December 2014. If the share price remains $9.51, that yield will screen out at 13.95% in January. Thomson Reuters has estimates of $1.16 EPS in 2014 and $1.15 EPS in 2016.

American Realty Capital Properties

Serious accounting issues recently were uncovered at American Realty Capital Properties Inc. (NASDAQ: ARCP). The REIT said that its current year’s dividend was safe, but it also said that it expected a planned sale to go through. Guess which company’s sale just fell through (hint, this one). Shares recently fell to under $8 after hitting 52-week lows, and now the yield screens out at about 12.75%.

Analysts have had to run for the hills here, and the official analyst targets from Thomson Reuters are $0.90 EPS in 2014 and $1.01 EPS in 2015. We cannot help but question those expectations as of now, and we also cannot help but wonder if that $1.00 annualized payout has a risk as well.

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Transocean Ltd. (NYSE: RIG) is another exploration and drilling outfit that has seen its shares get butchered in this recent oil crunch. Shares were at $44 in June and July, and they have tried to find a bottom around the $28 mark of late. This stock previously had a high yield even during the peak, but now the yield is even “accidentally higher” after the stock lost more than one-third of its value. The big question is whether the earnings report set for November 6 will bring news of the payout. The recent IPO of Transocean Partners LLC (NYSE: RIGP) adds some uncertainty on how to evaluateTransocean’s dividends, but that could actually help the company too.

Transocean’s $3.00 annualized payout generates a dividend yield of 10.5%. This is the top of the S&P 500 yields, and it has a $10.5 billion market cap. Here is the problem: Thomson Reuters has earnings estimates of $4.60 EPS for 2014, but that is expected to fall down to $2.73 EPS in 2015. The company still has over $2.1 billion in cash that it can fall back on, but dealing with $80 and under oil is a challenge, considering that the $0.75 per quarter payout has only been going for two quarters in a row.

Breitburn Energy Partners

It may not have the highest of the yield-equivalents in MLPs, but Breitburn Energy Partners L.P. (NASDAQ: BBEP) has a super-high payout for its market cap of more than $2 billion. The payout distribution is 11.7%, based on the late October announcement of a $2.01 annualized payout. Where things get complicated is that Breitburn is expected to have a loss in 2014 of $0.23 per unit, and Thomson Reuters has a consensus estimate of $0.83 earnings per unit in 2015 (with a range of $0.42 to $1.34).

Breitburn’s pending acquisition of QR Energy L.P. (NYSE: QRE) is hoped to add cash flow to support the payout. Until we have details from the November 18 special holder meeting, we will run this one without much color.

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There are also the Linn Co. LLC (NASDAQ: LNCO) and Linn Energy LLC (NASDAQ: LINE) entities. With earnings in the mix immediately, these are also discussed without much color. LinnCo fully covered its distribution and generated excess of net cash provided by operating activities. Still, the company expects to incur a shortfall of net cash provided by operating activities after distributions to unitholders and discretionary adjustments of approximately $94 million for the fourth quarter 2014. Fourth-quarter 2014 results are anticipated to include approximately $45 million of negative divestiture-related cash flows from the pending sale of Granite Wash and Cleveland plays and sale of certain Wolfberry properties.

LinnCo’s $2.90 distribution generates a 12.6% yield equivalent from its distribution. Thomson Reuters has earnings estimates of $0.95 per unit in 2014 and $2.91 per unit in 2015.

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