Beware of These High-Yield Dividend Stocks with Red Flags
As an income investor, a high dividend yield can be tantalizing. However, it’s essential to look beyond the attractive yield and examine the underlying financials of the company. NextEra Energy Partners, Annaly Capital Management, and Community Healthcare Trust are three high-yield dividend stocks that may seem appealing at first glance, but they have some concerning financial indicators that should give investors pause.
NextEra Energy Partners: A Yield That Should Raise Concerns
NextEra Energy Partners’ dividend yield is approaching 20%, a level that should set off alarm bells for income-seeking investors. The market expects the company to slash its payout soon, and the renewable energy dividend stock has hinted that a cut is forthcoming. Previously, the company had expected to continue increasing its dividend, aiming for 5% to 8% annual growth through 2026. However, it removed that language from its most recent earnings report, replacing it with information about alternatives it’s evaluating to address its high cost of capital and remaining convertible equity portfolio financing obligations.
Annaly Capital Management: A High-Yield Dividend on Shaky Ground
Annaly Capital Management’s dividend currently yields over 13%, but the mortgage REIT’s big-time payout is on shaky ground. The main cause for concern is the decline in Annaly’s earnings available for distribution (EAD). Its EAD was down to a mere $0.66 per share during the third quarter, perilously close to its current dividend level of $0.65 per share. If EAD continues to fall, Annaly will likely need to cut its dividend again.
Community Healthcare Trust: A High-Yielding Dividend with a Struggling Tenant
Community Healthcare Trust currently yields over 10%, but the healthcare REIT’s elevated dividend payout ratio is a concern. Its most recently declared dividend level of $0.465 per share was nearly 90% of its adjusted funds from operations (FFO) in the second quarter. This high payout ratio is partly due to a struggling tenant, which may not continue making rent and interest payments. If the tenant defaults, the REIT might need to reduce its dividend.
The Bottom Line
While these high-yield dividend stocks may seem attractive, their financial profiles suggest that those payouts might not last much longer. Income investors seeking a stable income stream should exercise caution and avoid these stocks for now. It’s essential to prioritize the sustainability of a company’s dividend payout over its yield, ensuring that your investments generate consistent income without exposing you to unnecessary risk.
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