3 Scary High-Yield Dividend Stocks That Income Investors Should Avoid Right Now
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A high dividend yield can be very alluring to an income investor. In theory, it would enable investors to generate more income for every dollar they invest. Unfortunately, a high yield can often be like a siren's song and lead an investor to a destructive outcome when the company slashes its payment.
NextEra Energy Partners (NYSE: NEP), Annaly Capital Management (NYSE: NLY), and Community Healthcare Trust (NYSE: CHCT) currently have monster dividend yields. However, they have some scary financials. Income investors should therefore avoid these high-yield dividend stocks right now.
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The signs are obvious
NextEra Energy Partner's dividend yield is approaching 20%. A yield that high should send shivers down the spines of income-seeking investors. It clearly indicates that the market expects the company to slash its payout shortly.
The renewable energy dividend stock has been hinting that a cut is forthcoming. NextEra Energy Partners had previously expected to continue increasing its dividend, aiming for 5% to 8% annual growth through 2026, with a target of 6%. It could achieve that while maintaining a dividend payout ratio in the mid-90s, which is awfully high.
However, it removed that language from the outlook of its most recent earnings report. The company replaced it with some more information about the alternatives it's evaluating to address its high cost of capital and remaining convertible equity portfolio financing obligations. It noted that it's "focusing on its capital structure and the potential for redeployment of more cash flow toward driving organic cash flow growth." This statement suggests it will reduce its dividend and allocate that cash toward organic expansion investments. NextEra Energy Partners plans to complete its review by January, meaning it could cut its payout early next year.
Walking on a tightrope
Annaly Capital Management's dividend currently yields more than 13%. While it's not uncommon for a mortgage REIT to have a high yield, Annaly's big-time payout is on shakier ground than most of its peers.
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, dangerously close to its current dividend level of $0.65 per share. EAD was $0.68 per share in the third quarter and $0.89 per share at the end of 2022. The slide in EAD forced the REIT to cut its dividend from its prior level of $0.88 per share in early 2023. That was one of the many reductions it has made over the years.