A high dividend yield can be alluring for an income-focused investor, especially in today’s low-yielding environment. However, it can also be a sign that a company’s dividend is in trouble.
Because of that, investors need to thoroughly analyze higher-yielding stocks to make sure they aren’t dividend-yield traps. That should include watching them for a few quarters to make sure their financial metrics or business plans trend in the right direction for dividend sustainability.
With that in mind, here are five dividend stocks with enticing payouts that income investors might want to put on their watchlists.
A good way to invest in real estate
Gladstone Commercial (NASDAQ:GOOD) is a real estate investment trust (REIT) that pays a 6.6%-yielding monthly dividend. The company has a solid business model, as it owns a diversified real estate portfolio — office, industrial, retail, and medical office properties — net leased to various tenants.
The company’s diversification and net leases — where tenants pay most expenses — enable the REIT to generate steady rental income. The issue with Gladstone is its high dividend payout ratio of about 95% of its funds from operations (FFO), which limits its financial flexibility. As such, investors might want to watch for an improvement in the payout ratio before adding this REIT to their income portfolios.
Going global for passive real estate income
Global Net Lease (NYSE:GNL) has a similar business model as Gladstone Commercial. It also has a diversified portfolio — office, industrial, and retail properties — net leased to financially strong tenants. The only difference is its global focus, as a third of its rental income comes from outside the U.S. It also offers an even higher dividend yield of 8.8%.
However, the REIT also has a high payout ratio, even after reducing its dividend last year. Again, investors might want to watch to see if this REIT improves its payout ratio before buying shares, since it might have to cut the dividend again if it doesn’t boost it another way.
Wait to see if the rumors are true
Phillips 66 Partners (NYSE:PSXP) currently yields 9.4%. One factor weighing on the pipeline master limited partnership (MLP) is its controversial oil pipeline in North Dakota that opponents want to shut down. If that happened, it would significantly impact the company’s income.
In addition to that, the MLP’s parent, refining giant Phillips 66, might take it private, given the issues surrounding that oil pipeline and the energy market. Because of that, investors might want to wait and see how things shake out before buying this MLP for its income stream since it could evaporate quickly.
Breaking up is hard to do
Utility Duke Energy (NYSE:DUK) currently yields 3.8%. While utility dividends are usually as solid as they come — Duke recently increased it by 2% and has paid one for 95 years — there are some question marks about its future. That’s because the company is under pressure from an activist investor to break apart.
If Duke does split off or sell some of its businesses, it might reset the dividend to retain more cash for reinvestment in projects focused on renewable energy. (That’s what happened when rival Dominion Energy sold off most of its gas infrastructure assets to clean up its emissions profile.) Given that possibility, investors might want to wait to see what Duke decides before adding it to their portfolios for income.
Uncertainty about the future of the office
Office Properties Income Trust (NASDAQ:OPI) is another REIT with a high dividend yield of 7.5%. The company, as the name suggests, focuses on owning office properties. That’s a concern given the uncertain future of the office in a post-pandemic world.
In particular, the REIT has a significant number of leases expiring over the next two years at 23.9% of its total space representing 20.8% of its rental income. If the company doesn’t secure new or renewal leases for this space at rates consistent with expiring leases, it will pressure its rental income. Given that unknown, investors might want to see how leasing recovers before buying this REIT for its big-time dividend.
Interesting income ideas to watch
There’s usually a reason why a dividend stock has a high yield. In these cases, there’s some uncertainty about the future of the payout because of a tight financial profile or another headwind. Because of that, income investors should take a step back and watch these high-yield stocks for a while before buying to make sure they aren’t dividend-yield traps.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.