Contemplating the Purchase of Three High-Yield Dividend Stocks Listed on the Nasdaq?
Contemplating the Purchase of Three High-Yield Dividend Stocks Listed on the Nasdaq?
If you're interested in investing in stocks that pay dividends, you're tapping into a smart strategy. These shares from healthy and expanding companies that pay dividends often increase in value over time, and their dividend payouts usually follow suit.
Take a look at the data below, which is a revised version of data from a Hartford Funds report:
| Dividend Policy | Average Annual Total Return, 1973-2023 || --- | --- || Dividend Growers and Initiators | 10.19% || Dividend Payers | 9.17% || No Change in Dividend Policy | 6.74% || Dividend Nonpayers | 4.27% || Dividend Shrinkers and Eliminators | (0.63%) || Equal-weighted S&P 500 index | 7.72% |
Notice how difficult it is to surpass dividend payers.
However, it's essential to remember that not all dividend payers are created equal. Some are headed for greatness, while others are destined for the trash bin. Many investors often gravitate towards the highest dividend ratios, but it might not be ideal. Let me explain why by examining some of the highest dividend ratios in the Nasdaq stock market.
What's so wrong with substantial dividend ratios?
While having a substantial dividend ratio isn't always a bad thing, it could serve as a warning sign worth investigating more closely. This is because it often reflects a stock that has significantly dropped in value – often due to valid reasons.
Dividend growers and initiators
To calculate a stock's dividend ratio, you divide the stock's annual dividend (you might need to multiply its current quarterly payout by four) by the stock's current price. For instance, if TKTK Co. is worth $100 per share and pays out $1 per quarter, you would multiply $1 by four, which equals an annual dividend of $4. Then, divide that by $100, and you get 0.04, or 4%. That's the stock's dividend ratio.
10.19%
Now, imagine TKTK's price has dropped to $50 per share. To find its new dividend ratio, divide $4 by $50, which results in 0.08, or 8%. You see? Its dividend ratio has significantly increased. If it's high because the company is in trouble, a dividend cut or suspension might be imminent.
High dividend ratios in the Nasdaq
Dividend payers
Here are three companies with some of the most generous dividend ratios in the Nasdaq stock market.
9.17%
1. AGNC Investment
AGNC Investment (AGNC 1.72%) recently offered a dividend ratio of 15%. That's undeniably tempting, but dig deeper. The company is a real estate investment trust (REIT), but it's not the kind of REIT that purchases and leases large amounts of real estate. Instead, it's another type of REIT that invests in mortgage-backed securities.
No change in dividend policy
These businesses acquire or originate mortgages and mortgage-related securities. They specialize in real estate financing, rather than in buying and leasing properties themselves. Mortgage REITs are exposed to risks from changing interest rates, borrowers paying off or refinancing loans, defaulting borrowers, and so on.
6.74%
Despite being tempting, a closer examination of AGNC Investment reveals that its payouts and stock value have been decreasing. Essentially, this business is not designed to be an income generator.
2. Icahn Enterprises
Dividend nonpayers
You may also be drawn to Icahn Enterprises (IEP 1.56%) due to its dividend, which recently yielded 19.8%. (Yes, you read that right.) It's named after the billionaire (and activist investor) Carl Icahn, who is now 88 and owns more than 85% of the company.
4.27%
However, this is not likely to be a stock that will reward you with abundant income over the years. First of all, it's not a typical common stock. The company is set up as a master limited partnership (MLP), which can be complex when it comes to taxes. For example, MLPs issue annual K-1 schedules, which need to be included in your tax return.
Some MLPs look promising, but Icahn Enterprises is not one of them. As my colleague Anders Bylund has noted, the company is taking on significant risk and has not been performing well lately. Indeed, in 2023, Hindenburg Research argued that Icahn Enterprises cannot support its payout. Although the validity of these claims is unclear, they do not inspire confidence.
Dividend shrinkers and eliminators
3. Walgreens Boots Alliance
(0.63%)
Finally, consider Walgreens Boots Alliance (WBA 3.37%), which recently offered a substantial dividend ratio of 9.6%. This high dividend ratio is a prime example of an increased yield due to a decrease in stock price. A glance at Walgreens' stock chart reveals this clearly. Furthermore, the quarterly payout of $0.25 per share is just over half of what it was in 2023.
Reduced dividends are often connected to struggling companies, and Walgreens is struggling. It has posted losses, closed locations, and is attempting to turn things around, in part by appointing a new CEO, Tim Wentworth.
Equal-weighted S&P 500 index
Whenever you encounter an appealing dividend ratio, take the time to thoroughly research the company to check if it's in trouble.
7.72%
Investing in stocks with high dividend ratios might seem appealing, but it's essential to exercise caution. These high ratios can often indicate a stock that has significantly dropped in value, potentially signaling trouble ahead. For instance, a closer look at AGNC Investment, which offered a dividend ratio of 15%, reveals that the payouts and stock value have been decreasing, indicating that it's not designed to be an income generator.
It's crucial to remember that a high dividend ratio can be a warning sign, and it's essential to conduct thorough research before investing. A company with a high dividend ratio might be facing financial difficulties, leading to potential dividend cuts or suspensions.