We take a very pragmatic approach to dividends here. Dividend appreciation is a long term goal and we’ve always emphasized the quality of the dividends and the health of their associated companies above all else.
Frequently, we’ve discouraged chasing dividend yield blindly. Instead we ask that you focus on the long-term sustainability and the economic prospects of every company you consider.\
Yet, every once in awhile it helps to look at the high flying stocks paying the juiciest dividend. Working from the top, we found the ten stocks that pay double digit dividend yields. Yields so high that they make income seeking investors jaws drop. Stocks with such unbelievable yields that they’ll make you question what are high dividend stocks.
This week, for the sake of investment science, we’ve taken the top ten dividend yields on the market and looked under the hood to see what they can offer. Here’s what we found:
|BPT||BP Prudhoe Bay Royalty Trust||23.12%|
|VOC||VOC Energy Trust||18.96%|
|SDR||SandRidge Mississippian Trust II||17.81%|
|SDT||SandRidge Mississippian Trust||16.69%|
BP Prudhoe Bay Royalty Trust
This one is the highest yielding trust listed on the market now, and it’s an odd one. The trust collects royalty payments on oil and gas reserves underneath Prudhoe Bay. These reserves are estimated to run out by 2020, which means the listed trust will be worthless paper by then.
The trust was set up in 1980’s when BP needed quick cash. It promised to pay out 16% of the oil pumped in the Bay. The catch here is that higher oil prices will encourage more oil drilling in the Bay, but if prices stay lower for longer it could spell an end to this stream of income. Buying this trust is a bet on much higher oil prices in the future.
Sage Stores didn’t set out to pay a high dividend. The apparel maker has been pushed to the top of the dividend yield charts because its stock price dropped throughout the year. At $2.69 the stock is 63% off its 52-week high. Sales are dropping and cash is quickly running out. The management has said they will continue to pay a dividend because they’ve done so for 44 quarters so far. But with losses piling and a vague turnaround strategy being implemented, this is a bet for a risk-hungry income seeker.
VOC Energy Trust
Another energy trust owned for the benefit of VOC Brazos Energy Partners, L.P. (VOC Brazos). Profits are derived from oil wells across Kansas and Texas.
SandRidge Mississippian Trust (I & II)
SandRidge Trusts, both I and II, are energy trusts just like the other trusts on this list. I receives its royalties from oil wells located in Alfalfa, Garfield, Grant and Woods counties in Oklahoma. II, meanwhile, receives additional royalties from Kay County in Oklahoma and Barber, Comanche, Harper and Sumner counties in southern Kansas. A quick analysis shows you why these two energy trusts (or any others for that matter) are not exactly long-term investments.
You’ll note that a majority of the highest yielding stocks we’ve mentioned are not typical stocks at all. Instead, they’re energy royalty trusts. These trusts have only one purpose – collect royalties on oil production. This structure means the distributions to investors are rather high but also significantly variable.
The distributions count as capital gains, which means they are taxed at a lower rate than dividends. Also, the earnings get directly distributed to investors which means there is no corporate taxes on profits.
However, these assets are volatile streams of income. Distributions can vary widely from quarter to quarter and oil prices play a disproportionate role in the income you can hope for. If oil prices remain low for long periods, the rate of drilling will decrease and your distributions are out the window.
The price for a royalty trust will naturally decline over time as the royalty base (properties) are exhausted. The only way for the price to appreciate is for the price of the commodity (oil) to increase faster than the reserves are being depleted.
The boom and bust cycles of the oil market are another big concern for such trusts.
Valuing these trusts involves estimating the present value of all the cash from the proven oil reserves, which is a notoriously difficult task. Also, the oil wells and proven reserves are limited, which means that these trusts do not appreciate in value they depreciate over time.
The few actual stocks on the high yield list are likely to be on the verge of failing. Betting on a turnaround is a common strategy, but it isn’t an appealing tactic for income-seeking investors who value stability.
In other words, a high yield means nothing if the stock price has fallen by 60%, the company operates in a dying industry, has too much debt, or if the cash flows rely on the unpredictable oil market.
A quick look at the highest yield dividend stocks on the market is an exercise in prudence. Of the top five dividend yield securities, only one was an actual stock – Stage Stores. None of these stocks or trusts are worth recommending or buying. Instead, they’re worth studying to see what a unsustainable or volatile dividend policy looks like.