Join        Login             Stock Quote

Are The Dividends Safe For These High-Yielding Stocks?

 January 29, 2013 10:16 AM

Everyone wants to earn more. For investors in dividend growth stocks, the quick way to earn more is to select dividend stocks with higher yields. Swap those 2-4% yields in for stocks earning 6-10%, or more. Before making the trade, you should ask yourself the following two questions:

1. Why is the yield higher? and

2. Are these higher yields sustainable?

Structure Driven Yields

One variation in yields can be attributed to the entity's tax structure. For example, Master Limited Partnerships and REITs do not pay income taxes. Instead, earnings are passed to investors who pay the taxes. Yields on these types of investments tend to be higher. Since the entity doesn't have to pay income taxes, there is more cash to distribute. Also, since earnings from these investments don't qualify for preferential dividend tax rates, the market adjusts the price of the investment down, which increases the yield, to compensate for the additional taxes owed.

Risk Driven Yields

The most significant determinant of yield is risk. In a world where risk is equal across all investments, yields within the same industry and investment vehicle would tend to be homogeneous with very little variation. When yields dramatically increase compared to the company's peers, this is a sign that there is increased risk with that investment. Before investing, you need to understand this risk to determine if you are willing to accept it.

[Related -8 Dividend Stocks Raising Their Yield On Cost]

This week week, I screened my dividend growth stocks database for the highest yielding stocks, not considering any other factors. The results are presented below:

[Related -Pitney Bowes (PBI): Is That High-Yield Stock Really A 'Dividend Trap'?]

Pitney Bowes Inc. (PBI) | Yield: 12.3%

Pitney Bowes Inc. is the world's largest maker of mailing systems, and also provides production and document management equipment and facilities management services. The U.S. Post Office is in financial trouble. PBI's revenue stream from its mailing business will continue to shrink. To offset this, the company has focused on less profitable business segments which will likely yield lower returns than its core postage-meter business. PBI's last three quarterly dividend increases have been an anemic $0.005 per share.

Vector Group, Ltd. (VGR) | Yield: 10.3%

Vector Group, Ltd. manufactures and sells cigarettes in the United States. It produces cigarettes in approximately 118 combinations of length, style, and packaging under various brands. Cigarette companies face three major obstacles: 1. Product liability litigation, 2. Anti-smoking laws/culture and 3. Excessive taxes. Although product liability litigation has been quite in recent years, in April 2009 the federal excise tax on cigarettes jumped to $1.01 per pack from $0.39. Tobacco will likely continue to be a target for additional state excise taxes. In June 2009, President Obama signed the Family Smoking Prevention and Tobacco Control Act into law giving the Food and Drug Administration (FDA) the power to regulate both the manufacture and marketing of tobacco products.

Nustar Energy (NS) | Yield: 8.8%

Nustar Energy L.P. is a leading independent operator of crude oil and refined products pipelines as well as terminal storage facilities. Limited partnerships yields tend to be significantly higher since they don't pay income taxes. Instead, the partnership's investors are responsible for the taxes (which could include multiple state tax returns.) Each year the entity issues a K-1 tax form to its unitholders to be incorporated into their tax returns. K-1s often run late (March/April delivery) and include potentially complex tax issues.

Below are other similar partnerships making the list:

Buckeye Partners LP (BPL) | Yield: 7.9%

Buckeye Partners LP is one of the largest independent U.S. pipeline common carriers of refined petroleum products, with over 6,000 miles of pipeline.

Suburban Propane Partners LP (SPH) | Yield: 7.3%

Suburban Propane Partners LP is a limited partnership that markets propane gas and other refined fuels to residential, commercial, industrial and agricultural customers.

TC PipeLines LP (TCP) | Yield: 7.3%

TC PipeLines LP has interests in over 5,550 interstate natural gas pipelines, including a 46.5% stake in Great Lakes Gas Transmission L.P.

Inergy, L.P. (NRGY) | Yield: 5.8%

Inergy, L.P.'s assets include incentive distribution rights in Inergy, LP, operates a retail and wholesale propane supply, marketing and distribution business.

Omega Healthcare Investors Inc. (OHI) | Yield: 6.9%

Omega Healthcare Investors Inc. is a real estate investment trust (REIT) that invests in income-producing healthcare facilities, mainly long-term care facilities located in the United States. REITs enjoy high yields since they do not have pay taxes if they distribute 90% of their earnings. Unlike partnerships, their income is reported on a 1099 for tax purposes. Low interest rates and reduced vertical competition has benefited REITs. Both will diminish at some point in the future.

As with past screens, the data presented above is in its raw form. Some of the the companies would be disqualified for poor dividend fundamentals. However some of the others may be worth additional due diligence.

Full Disclosure: Long OHI in my High-Yield Portfolio. See a list of all my dividend growth holdings here.



Post Comment -- Login is required to post message
Alert for new comments:
Your email:
Your Website:

rss feed

Latest Stories

article imageAutomating Ourselves To Unemployment

In this current era of central planning, malincentives abound. We raced to frack as fast we could for the read on...

article imageFed: Waiting For June… Or Godot?

The Federal Reserve left interest rates unchanged yesterday, as widely expected. But the possibility of a read on...

article imageThe Single Best Place To Invest Your Money For Retirement

It was never supposed to be this daunting. At least that's what we were read on...

article imageNegative Blowback From Negative Interest Rates

The Federal Reserve is widely expected to leave interest rates unchanged today. But perhaps standing pat read on...

Popular Articles

Daily Sector Scan
Partner Center

Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.