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Income and yield, dividends and royalties. They’re what investors are clamoring for going into 2023. And who can blame them after a year when the S & P 500 slid 20% and when six-month and one-year Treasury bills now yield north of 4.7%? After all, analysts’ forecast yield on the S & P 500 as a whole in 2023 is still only about 1.8% today. But investors need to tread carefully when hunting for extra dividend yield from common stocks. To be useful, dividends should be reliable, not variable. The attraction of certain stocks and securities grows less bright if dividends are cut or, worse yet, eliminated. Think of high dividend payouts as potential yield traps. To find red flags among high-payers, CNBC Pro searched the S & P 1500 Index, consisting of the S & P 500, Midcap 400 and Smallcap 600 indexes. Then we screened on FactSet through Dec. 22 only for those stocks with market values above $1 billion, dividend yields of at least 5%, debt-to-equity ratios over 100% and cash dividend coverage ratios below 3. Finally, we confined the search to companies where analysts expect free cash flow to decline in 2023, and whose stocks fell at least 20% in 2022. The result is five stocks with dividends ranging as high as 15.2%, but no lower than 5.5%. Two Harbors Investment clocks in with the highest current yield, at 15.2%. The residential mortgage real estate investment trust is down more than 30% in 2022, and its expected free cash flow is estimated by analysts to shrink 57% next year. More optimistically, however, its dividend coverage ratio stands at a reasonable 2.0. KKR Real Estate Finance Trust , another REIT, provides structured loans collateralized by commercial real estate and yields 12.3%. While its dividend coverage ratio is just 1.3, KREF also shows the smallest expected decline (-3.4%) in estimated free cash flow among the five stocks. Scotts Miracle-Gro has the lowest yield in the group (5.5%), but by far the highest level of debt as a percentage of equity. Maybe that’s why Scotts shares show the steepest year-to-date decline, at about 70%. Scotts and Medical Properties Trust (yielding 10.4%), a REIT that invests in health-care facilities, have the lowest dividend coverage on the screen, at 1.2. Equitrans Midstream , a natural gas pipeline company based in western Pennsylvania, yields about 9.0% but also has the highest dividend coverage ratio, at 2.5.
In an income-focused world, high dividends might turn into a dry well
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