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Stocks With Safe 10% Dividend Yields

June 24th, 2014

dividends1Lawrence Meyers: Not all dividend yields are created equal.

There are perpetual dangers with high-yield dividend stocks.  A high-yield may not be sustainable.  A high-yield may be high because a stock’s price is low for a reason.  In other words, the company may be struggling and investors recognize it.  They sell the stock off and the price drops.  Yield moves inversely to price, so a drop in price results in an increase in yield.

That’s why you have to be aware of “value traps” – stocks that seem like they might be values because the price is so low, but are low because the company is struggling and investors have sold it off.

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Example:  A stock is at $20 and pays a $2 dividend.  That’s a 10% dividend.  If the stock drops to $10, but the dividend remains the same, now it pays a 20% dividend.  What you should be concerned about is why the stock fell from $20 to $10!

You should definitely investigate further if a dividend yield is above 7%.

We happen to be investors at an unprecedented period in the stock market, when the Fed’s quantitative easing has pushed people further out on the risk curve.  They are hunting for yields, and companies are trying to cater to them.

The incredibly low interest rate environment has permitted many businesses to obtain cheap money that can be used for high-yield investments, of which most of the income is paid out to shareholders because the company is a REIT or BDC.

There are, however, high-yield dividend stocks that carry risk but less than others with equal or higher yields.  I consider these stocks to be relatively safe, for which any decline in stock price or yield as a result of the company’s activities seems unlikely, or will be well-telegraphed.

Four Stocks With Safe 10% Dividend Yields

1. BP Prudhoe Bay Royalty Trust (NYSE:BPT) is, as the name implies, a royalty trust.  These companies own oil wells, or possibly mineral rights, for the land that a certain entity is using.  This particular trust collects the royalty payments that are based on the amount of oil production from the Prudhoe Bay oil field, which is located in Alaska.

A royalty trust isn’t a business so much as a holding entity that collects and then distributes the royalties that it earns.  In this case, it applies to roughly 16% of the first 90,000 barrels of oil produced each and every day.  The Trust believes it can pay royalties until 2029, at which time we would expect the value of BPT to be zero.

So you should be fine collecting the 12.3% dividend for at least the next several years, provided oil prices remain relatively stable.

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