24/7 Wall St.

Investors have been told over and over to love dividends, as they provide income and stability to a portfolio. While those themes are often true, there can be a dark side to dividend investing. A number of companies have unbelievably high dividend yields. It is often questionable whether these companies can maintain such high yields.

Investors like dividends for more than just the periodic income they provide. A strong dividend generally signals that a company is especially stable, and it is supposed to reflect its expected earnings power in the future.

Click here to see Five Dangerous Dividend Yields Above 10%

The highest dividend yield in the Dow Jones Industrial Average is about 5%. When a company’s dividend yield is more than twice that, investors may be taking on serious risk. That is because there are two ways for yields to climb so high — either the company can increase the dividend payment or the company’s share price may have taken a hit. While we always hope for the former, a very high dividend yield often implies the latter. Having a dividend yield north of 10% is far higher than what investors can earn on most junk bonds.

24/7 Wall St. searched for companies with dividend yields of at least 10%. Some are pure dividends, some are considered dividend equivalent yields because they include a return on capital.

Most of the five companies with potentially dangerous, high dividend yields are in sectors that typically provide investors with high payouts. These include the mortgage real estate investment trusts (REITs), master limited partnerships (MLPs) and business development companies.

1. Annaly Capital Management
> Dividend yield: 13.2%
> Annualized dividend: $1.40
> Share price: $10.64
> Industry: REIT

Annaly Capital Management Inc. (NYSE: NLY) is a mortgage real estate investment trust. The company operates in an often volatile sector. In addition, issues related to the Federal Reserve’s purchases of mortgage backed securities under its quantitative easing plan pose challenges for all mortgage REITs. Annaly’s shares lost some ground after the company recently reported very weak third-quarter earnings. Currently, shares are trading around their 52-week lows, at $10.64. Annaly has been cutting its dividend payments since 2010, and some analysts expect that to continue. The consensus analyst price target is $12.35.

2. Chesapeake Granite Wash Trust
> Dividend yield: 20.6%
> Annualized distribution: $2.67
> Share price: $12.97
> Industry: Oil and gas

Chesapeake Granite Wash Trust (NYSE: CHKR) is another company that seems a bit scary on the surface because of its high distribution. Its market cap is less than $600 million, and it has only been public since late 2011. Although investors may be attracted by the high distribution yield, the trust carries of more than 22%, its shares may also carry a great deal of risk. In fact, the trust recently hit a 52-week low and is down roughly 40% from a 52-week high of $20.25. Goldman Sachs recently downgraded the trust to Sell from an already cautious Neutral rating, based on expectations that distributions would decline.

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3. Prospect Capital
> Dividend yield: 11.8%
> Annualized dividend: $1.33
> Share price: $11.26
> Industry: Asset management

Prospect Capital Corp. (NASDAQ: PSEC) is a business development company. It is involved in all aspects of financing for middle market companies, providing both private debt and equity, including refinancing, leveraged buyouts and acquisitions. It is one of the larger companies in its sector, with a $3.2 billion market cap. Prospect Capital pays dividends monthly rather than quarterly, and its dividend yield is 11.8%. Its shares are currently trading at $11.26, against a 52-week trading range of $9.80 to $11.62. The consensus analyst price target is $11.95.

4. QR Energy
> Dividend yield: 11.6%
> Annualized distribution: $1.95
> Share price: $16.88
> Industry: Oil and gas

QR Energy L.P. (NYSE: QRE), which has a distribution rate of 11.6%, is one of the larger master limited partnerships. But it is worth noting that MLP distributions generally are part income and part return on capital. Its distribution has been stable, and its share price of $16.88 is roughly in the middle of its 52-week range of $14.76 to $18.75. Since QR Energy went public late in 2010, its units have underperformed industry leaders. QR Energy’s consensus analyst price target is $20.29.

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5. Windstream Holdings
> Dividend yield: 12.5%
> Annualized dividend: $1.00
> Share price: $7.98
> Industry: Telecom

Windstream Holdings Inc. (NYSE: WIN) is a communications and cloud services provider for businesses. The company set its annual dividend at $1.00 before the recession and has managed to maintain it since. This has surprised investors, especially recently, as the payout has become much higher than the company’s 2013 and 2014 earnings estimates. Windstream is the only company in the S&P 500 Index with a dividend yield north of 10%. The company is highly leveraged, even with a market cap of close to $5 billion. The company’s shares sold off after the latest earnings report. This may be a sign of investor concern, even if the company has maintained that its dividend policy has not changed. Windstream’s consensus analyst price target is $9.13.