The Standard & Poor’s 500 is made up of some of the largest U.S. companies, including more than a few companies that pay large dividends. But just because a company is part of the S&P 500, it has not determined that its dividend is an absolute bet, nor does it guarantee that it will contribute to profitable investments. In fact, ultra-high dividend yield may indicate that the company may be prepared to cut spending.
Let’s take a closer look at the 10 highest-yielding dividend stocks in the S&P 500 Index. Some stocks will definitely buy stocks, but if you can avoid those stocks that may be a dividend trap, it will have a huge impact on the return on your portfolio.
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|CenturyLink Inc (NYSE:CTL)||12.51%|
|Kimco Realty Corp (NYSE:KIM)||7.68%|
|Iron Mountain Inc (NYSE:IRM)||6.78%|
|SCANA Corporation (NYSE:SCG)||6.54%|
|HCP, Inc. (NYSE:HCP)||6.38%|
|Welltower Inc (NYSE:WELL)||6.33%|
|L Brands Inc (NYSE:LB)||6.28%|
|Ventas, Inc. (NYSE:VTR)||6.21%|
|PPL Corp (NYSE:PPL)||5.7%|
|AT&T Inc. (NYSE:T)||5.5%|
Two very different telecommunications
The highest-yield and lowest-yielding stocks on this list – CenturyLink and AT&T are all telecommunications. However, although AT&T’s dividend is robust and grows regularly every year for ten years, CenturyLink’s spending is much higher than its multi-year earnings. It has been cut once in the past ten years if the company can cut back and start to create more.
Will this make CenturyLink unfeasible and AT&T will buy it? Well, it depends on what you are looking for and your risk tolerance. If this is a reliable high-yield rate and the possibility of regular growth is high, then AT&T is a viable path. Its 5.5% yield is twice the market average price, its low payout ratio, good prospects for modest growth, and management’s commitment to dividends make it an ideal choice if you want predictable returns.
On the other hand, if you are willing to take some risks (because I have) may get double-digit returns, then CenturyLink deserves to be regarded as a high-risk, high-return investment. Keep in mind that the entire paper depends on how the management successfully achieved the cost savings and cash flow growth from the Level 3 communications integration it acquired last year. According to management, the company will be free cash flow positive after paying dividends in 2018, which is a huge milestone in protecting expenditures. In addition, the company continued to plan for adjusted EBITDA of $975 million – revenue before interest, taxes, depreciation and amortization – synergies in the coming years.
Since the third-level merger, some modest progress has been made, but at this stage, investment in CenturyLink is seriously affected by commitments. If management fails to achieve this, it may become a revenue pitfall.
A retail real estate opportunity and a struggling retailer to avoid
Real Estate Investment Trusts – Real Estate Investment Trusts for short – Kimco Realty is one of North America’s largest shopping center owners, and concerns over the collapse of physical retailing have caused its stock price to fall by a third. However, traditional retailing is still active in the United States, although all big-name closures dominate the newspaper headlines. According to the study of the International Humanitarian Law team, the number of traditional retail sales and stores is actually increasing, and a few struggling retailers have promoted this statement.
This is not to say that things are perfect: – Kimco sold 21 shopping centers for $220 million in the first quarter, and this year’s goal is to sell another $700 million – its core business continues to perform well and tenants make up the opposition. E-commerce interruption. According to its fourth-quarter financial report, 74% of its ABR is from the grocery parking center. More than half of the tenants provide services or experience, and 40% of their ABRs come from tenant omnichannel services. In addition, it has only one tenant – 3.7% of TJX – more than 2.5% of its ABR. If a single large tenant folds, this greatly reduces the risk of loss.
Based on operating 12 times of 2017 funds, Kimco’s pricing is very reasonable and its 7.7% dividend yield may be more secure than it looks.
On the other hand, L Brands, owner of Victoria’s secret and bathing and body works, is a troubled retailer. The company reported that same-store sales fell by 4% in 2017 and was almost as much as when new stores were opened. This re-adjustment of its retail footprint has always been an expensive task, putting pressure on the company’s cash flow. Its GAAP payout ratio – the percentage of profit required to cover dividends – appears to be relatively certain at 70%. However, when we compare the cash payment ratio with the cash payment ratio, math is not so good.
What worries me is that L brand companies need to continue to spend cash to close poorly performing locations while investing in new locations, burning large amounts of cash to generate modest (if any) sales growth. The company will not be able to maintain dividends that exceed cash flow. Therefore, before investing in the company, I would like to see a significant drop in its cash payment rate. In short, dividends will be the first thing that may be cut to retain cash, which makes L Brands a high-risk stock for stock investors.
Short-term fear but long-term trend
For companies that rely heavily on debt, rising interest rates are not very good. Most real estate investment trusts do the same. The following are the interest rates for the past few years:
The U.S. long-term interest rate data is calculated based on YCHARTS.
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In short, this has caused a large number of investors to be intimidated by companies that use large amounts of debt. But I think this also creates some opportunities because interest rates are still far below the historical average:
US Long-term Interest Rate Chart
The U.S. long-term interest rate data is calculated based on YCHARTS.
HCP, Ventas and Welltower are medical insurance REITs, with hospitals, medical office buildings, skilled nursing, rehabilitation and research facilities. In the past few years, all three companies have faced short-term challenges. For example, HCP is shifting its investment portfolio out of high-end residential properties, particularly the nursing home complex that has been striving to reduce in recent years, and is investing heavily in medical research facilities. HCP’s struggle in this area still accounts for 40% of its portfolio, resulting in a reduction of its dividend in 2016.
On the other hand, Welltower places more emphasis on senior housing, especially Alzheimer’s disease or other forms of dementia. In the next 20 years, Americans aged 80 and over will nearly double, while a high percentage of this age group suffers from dementia. Although higher interest rates have recently affected Welltower–although it is trying to reduce debt to mitigate the impact–it is one of the best REITs that has benefited from long-term trends.
A few years ago, Ventas had stripped off its nursing home segment and avoided the recent decline in nursing homes that affected Welltower and HCP’s profits, and instead focused on older homes-thinking that more and more independent and assisted living facilities have been in demand for the past decade. This is the key reason why Ventas has tripled its Welltower’s dividend over the past decade, and HCP is still at a 10-year low after its 2016 reduction:
Looking ahead, I will agree that Welltower and Ventas surpass HCP. Although the HCP’s move into the research institute may have great benefits, its implementation history is not as stable as Welltower or Ventas, so I would think that the party that the management performed in the past is potentially different from the potentially better aspects of HCP.
Finally, there are iron mountains. Since becoming a real estate investment trust in 2012, the company’s dividend has increased by 135%, which is much higher than the growth rate of cash flow:
Lessons here? Future dividend growth – and the sustainability of Iron Mountain’s spending – will be linked to its ability to continually increase cash flow. Due to the acquisition of the US business of the IO data center, its recent earnings per share have been hit, but I think this is a wise long-term move. Today’s Tieshan is closely related to the storage of physical records, but over time, the shift to paperless records will weaken its dominance in paper storage.
Its deep relationship with big companies – more than 90% of Standard & Poor’s 500 companies use Iron Mountain – should help transform it into an electronic records and data center business, but it has a great competitive advantage in this area. Iron Mountain’s business – dividends – should remain for many years, but its ability to increase spending may be limited by the need to invest in virtual records.
The story of two utilities
SCANA and PPL are two separate utilities in this list. In general, utility companies are very good investments for those who are seeking dividends. They give priority to stable income in each economic environment, have certain growth prospects each year, and probably most importantly – a relatively safe one. Stock price. Although both SCANA and PPL have enjoyed small dividend growth in recent years, the two companies failed to retain shareholder capital and their share prices have fallen 49% and 30% respectively from their 12-month highs.
SCANA’s trouble came after the failure of South Carolina to develop two new nuclear reactors that had incurred costly overruns (almost entirely by SCANA customers) that caused huge losses and eventually eliminated nuclear projects. Recently, SCANA announced that it has agreed to be acquired by Dominion Energy.
For PPL, the market’s concerns are more related to its major impact on the UK for two reasons. First, currency conversion has had an impact. Although the PPL has done a good job of hedging its downside risks, these concerns may be exaggerated. Second, the combination of Britain’s political and regulatory uncertainties – which will almost certainly increase supervision, some British high-level politicians even mention the nationalization of some utilities – are driving many investors away from the company.
The PPL also has a large amount of debt that will expire in a few years, which will have to be refinanced or repaid. Management stated that it will raise some funds through a secondary stock issue, but it will also issue new debt. Between the dilution of new stocks and the near-determined drop in interest rates for bond repayments, PPL may face increasing pressure on dividends in the coming years.
Frankly, I think investors may do better than either of them. SCANA’s shares will be converted to Dominion (and its 4.8% yield) after the acquisition, and the PPL’s 5.7% yield has many questions related to its UK business. AT&T is a better choice if it is a reliable 5% or more yield, minimum risk of downside and stable – if not very high – your dividend after that increases.