High-dividend stocks may seem appealing to investors, but experts warn against solely focusing on high yields. Deiya Pernas, CFA and co-founder of Pernas Research, notes that stocks with very high dividend yields often indicate poor investments. These stocks typically have high debt loads, elevated dividend payout ratios, and low EBITDA cash flow conversion, signaling financial instability and a high likelihood of future dividend cuts.
For example, Icahn Enterprises L.P. (IEP) boasts a current dividend yield of 24.23%, but Pernas cautions that the company’s dependency on billionaire investor Carl Icahn could pose a risk. Similarly, San Juan Basin Royalty Trust (SJT) with an 8.49% dividend yield is highly sensitive to oil and gas price fluctuations, making it vulnerable to potential reductions in distributions.
Enbridge Inc. (ENB), an energy company with a 7.33% dividend yield, is facing declining sales and heavy debt burdens, raising concerns about future growth. Invesco Mortgage Capital Inc. (IVR), a real estate investment trust with a 17.22% yield, faces risks due to short-term borrowing to finance long-term assets.
Medical Properties Trust, Inc. (MPW) and Global Net Lease Inc. (GNL) also present risks with dividend yields of 11.19% and 14.71% respectively. MPW’s high leverage and declining profitability raise concerns, while GNL’s financial challenges and negative net income could impact distribution levels.
It’s crucial for investors to look beyond high dividend yields and consider the overall financial health of a company before making investment decisions in order to mitigate risks and maximize returns in the long run.