On a daily basis, investors around the world are asking “what stocks pay the highest dividends”? Today, Chief Income Strategist Marc Lichtenfeld explains why bigger isn’t always better when it comes to dividend yields.
Hi Everyone, Marc Lichtenfield, Chief Income Strategist with The Oxford Club. Welcome to State Of The Market. Today I want to talk about something I’ve been saying for years…size doesn’t matter. I’m talking about dividends of course. Now investors love big dividends and really high yields. But when a company has a sky high yield, it’s very risky.
Think about it…many blue chips have a dividend yield of 3% to 4% right now. A slightly riskier but quality master limited partnership or REIT (Real Estate Investment Trust) is yielding 6%, 8%…maybe even 10% (if they really got beat up recently)…that is sort of the standard for a dividend yield. So if a company is yielding 20%, 30% or more, there is some serious risk there. Now that doesn’t guarantee that the stock is going to get hammered or that the dividend is going to be eliminated. But it does increase the likelihood significantly. So today I want to look at three of the highest yielding stocks in the market.
Now for starters, if you just google “what stocks pay the highest dividends”, most of the stocks that will come up have already cut their dividend or eliminated it. So the list that you find is not going to be particularly relevant. Today we’re looking at three stocks with the most current information. This is after they have already announced a new dividend or a dividend cut.
3 Stocks That Pay The Highest Dividends
1. Redwood Trust (NYSE: RWT)
This is a mortgage rate that yields 28%. And it actually raised its dividend in February to $0.32 a share from $0.30 (on a quarterly basis), which is unbelievable. But, the dividend was due to be paid on March 30. A few weeks before that, the dividend was delayed to June 12… that is not good. In fact, I have never heard of that in my career. Now I’ve been in the markets for 30 years and I can’t ever remember a company declaring a dividend and then saying “give us a few more weeks to come up with the money”. That just doesn’t happen!
I mean you have companies that eliminate dividends all the time, cut their dividends, but I’ve never heard of a company declaring it and then saying there is a problem. So we’ll see if it actually does get paid on June 12. If it does I would look for a dividend cut or even an elimination after that, because that is really a very bad sign that they had to delay their dividend.
Watch our latest State of the Market Video to find out what stocks pay the highest dividends.
2. Amplify Energy (NYSE: AMPY)
This is an oil and gas producer with a 30% yield. Now the 30% yield is after it already cut its dividend in March. So that dividend has been cut already and it’s still yielding 30%. This is a big yielding company… and it’s likely to do it again.
Here’s why…
It paid out all of its free cash flow in dividends in the first quarter. Now this company is an oil and gas producer. In Q1, oil prices ranged from about $65 dollars and then fell down to about $20. In the second quarter (where we are now), oil prices are lower in the teens. So their free cash flow is likely to fall in the second quarter. It’s very likely to fall.
Again, this is because they already paid out all of their free cash flow in the first quarter. If they have less free cash flow in the second quarter and they’re paying a 30% yield right now, I think you’re going to get a dividend cut going forward. So don’t count on that 30%.
Finally, our last stock paying a high dividend…
3. Oasis Midstream Partners (NASDAQ: OMP)
I think this one is really interesting. Oasis Midstream Partners (OMP). Now they are a pipeline company. So this is different than an oil and gas producer in that it doesn’t matter if oil is trading at $65 or $15. It costs the same amount to transport it through those company’s pipelines. OMP has a 40% yield.
Now the company has not communicated with investors at all since February when it released its 4 quarter results. A lot of companies have come out with statements about the pandemic or the economic situation. OMP has not. They have been quiet. So we don’t know at this point what their financials are going to look like. Or whether their dividend is going to be cut. They haven’t said anything. But, it’s hard to imagine that a company with a 43% yield, in this economic climate is going to maintain its dividend.
Now I should point out, they actually could afford the last dividend that they paid, very easily. They had great numbers in 2019. Their free cash flow was double what they paid out in dividends. So they’ve got a nice buffer there. But, since we’re in the middle of an economic crisis and this company has a 43% yield, they could easily cut the dividend in half, still be yielding 20% (which any investor would be thrilled with) and save some money for a rainy day. Build up that cushion in case things get worse, in case their customers stop transporting oil through their pipelines or renegotiate contracts.
So, I do believe that even though their financials looked good in the last quarter and in the last year, a 43% yield is just too high. And to be honest, a yield THAT high, scares the bejesus out of me. I like high yields, but not that high.
Safe High Dividend Stocks
Finally, instead of asking “what stocks pay the highest dividends?”, you should be looking for high-yielding stocks that are also safe.
Next week, we’re going to look at three of the safest, high-yielding dividend stocks. They won’t be 43%, I can tell you that. But these are going to be very high dividend payers, that will allow you to sleep at night without worrying if your dividend is going to be cut.
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