With 30-year Treasury bonds yielding just 3 percent despite widespread predictions of a Federal Reserve rate hike, high-dividend stocks continue to present an appetizing option for many investors.
Of course, not every name falls into that bucket. Eighty-three of the megacap stocks in the S&P 500 pay no dividend whatsoever. But at the other end of that spectrum sit three stocks: Frontier Communications,Kinder Morgan and Oneok.
With dividend yields of more than 8 percent each, those three names are the S&P’s highest-yielding stocks.
To a certain extent, that is a function of those stocks’ steep drops. Frontier Communications shares are down 30 percent in the past year, Kinder Morgan is down 41 percent and Oneok is down 47 percent. As a share price falls, its dividend per share will naturally rise.
This is where things get a bit tricky. So long as the dividend payout remains stable or rises, these super-dividend names could present great values for their yield alone, no matter what the shares do. But if the company loses its ability or will to pay out the high dividend, investors could be stuck holding a broken stock for all the wrong reasons.
Among the three names, analysts appear the most confident about Frontier’s dividend, the single highest in the S&P.
The dividend is “an attractive aspect of the story, and I think it is a comfortable payout ratio, so I would say that it is a fairly secure dividend,” RBC Capital Markets analyst Jonathan Atkin told CNBC.
Frontier runs a somewhat interesting business, providing communications services in 28 states, largely in rural areas. In 2015, losses of both residential and business customers have created investor angst. But the bottom line for most investors remains the yield.
“FTR’s 42 cent annual dividend is safe and we view the stock as attractive at its current 8.7 percent yield, the highest amongst the rural carriers we cover,” D.A. Davidson analyst James Moorman wrote in a recent note in which he maintains his “buy” rating.
On the other hand, when it comes to Kinder Morgan and its 8.4 percent yield, “I don’t think the dividend in and of itself is a reason to buy the stock,” said Jefferies analyst Christopher Sighinolfi.
Kinder Morgan has managed to raise its dividend in every single quarter of the year, despite the massive drop in the prices of the commodities it transports. That’s not necessarily the best use of capital, given the company’s demanding capital expenditure budget and ongoing equity financing needs, he said.
In the first three quarters of 2015, Sighinolfi said Kinder Morgan raised $3.82 billion in equity and paid $3.08 billion in cash dividends. “I think a lot of people question whether that’s a prudent process,” he told CNBC on Wednesday. “Management would say, ‘We are raising equity to pay for capex.’ Cynics would say, ‘You’re raising equity to pay for your dividend'” as a way to appeal to investors.
Fellow energy transportation company Oneok, with a dividend yield of 8.1 percent, doesn’t share the same slew of problems, he said.
“Oneok doesn’t have nearly the capital expenditure means that Kinder Morgan has, and Oneok is not promising significant growth on its dividend,” Sighinolfi said. “The treadmill beneath [Kinder Morgan] on the dividend front is getting faster and faster.”
However, Moody’s fixed income analyst Andrew Brooks says that Oneok’s dividend looks shaky indeed. Brooks warns that Oneok may have to cut its dividend because Oneok Partners, the master limited partnership from which Oneok derives its cash flow, isn’t earning enough to cover the cost.
More generally, Albert Brenner of People’s United Bank says that “an 8 percent dividend is really a warning sign, rather than an opportunity sign.”
Indeed, just because a stock’s dividend is currently high, that doesn’t mean it can’t get higher as the stock falls further.
The commodities that Kinder Morgan transports “are just in freefall,” Todd Gordon of TradingAnalysis.com said Wednesday on CNBC’s “Power Lunch.”
“Kinder Morgan is yielding about 8 percent right now, but in the next month they could be yielding 11, 12, 13 percent,” Gordon said.