Contemplating Investment in the Top Three Dividend-Yielding Stocks Listed on the Nasdaq?
The initial notion seems sensible enough - buying shares with the highest dividend yields supposedly guarantees the highest income. However, as the wise say, there's always more to the tale. Your role as an investor is to pinpoint and evaluate any hidden costs or risks that haven't materialized yet.
That said, before diving headfirst into the highest-yielding dividend stocks in the Nasdaq Composite, such as Icahn Enterprises (IEP -0.79%), AGNC Investment (AGNC 0.42%) and Torm PLC (TRMD 3.73%) due to their current impressive yields, it's worth reevaluating your decision. You might even reconsider investing after taking a closer look.
The Nasdaq's highest-yielding stocks come with a disclaimer
Diving straight into the details, the Nasdaq's highest-yielding firms at the moment (excluding small caps and exchange-traded funds) include Icahn Enterprises, AGNC Investment, and Torm PLC. Their predicted dividend yields are currently at 16%, 15%, and 21% respectively, which are striking numbers compared to the S&P 500's trailing dividend yield of 1.3%.
While these yields might be tempting, they shouldn't be taken at face value.
It's not saying you won't see these yields with these stocks at some point. You most likely will, at least temporarily. Yet, it's important to acknowledge that these high yields aren't likely to persist, and even if they do, your investment capital remains at an uncomfortable risk during that time.
Let's revisit Icahn Enterprises as an example. As a conglomerate controlled by the influential activist investor Carl Icahn, Icahn Enterprises has experienced periods of bullish success since its public listing in 1987. Despite this, the firm's lack of diversity has been a significant challenge. For instance, its heavy investment in energy and automotive-related stocks has caused issues during unfavorable market conditions. Moreover, Icahn Enterprises shares have returned to their 2004 trading values, while the dividend has been reduced to a quarter of its early 2023 level as Icahn tries to stabilize the situation.
Icahn Enterprises serves as a cautionary tale of how a speculative stock-picking approach can lose its effectiveness without warning.
Similarly, AGNC Investment teaches us a different lesson. As a real estate investment trust (REIT), AGNC Investment engages in real estate investments, rerouting the majority of its profits to investors. While REITs can focus on various real estate assets like apartments or offices, AGNC Investment is unusual. It invests in mortgage loans issued by institutions such as Fannie Mae and Freddie Mac.
Alterations in interest rates and real estate market volatility have negatively affected AGNC Investment's business model. Despite lowering its monthly dividend payment in early 2020, AGNC Investment has struggled to meet its income requirements. Consequently, investor doubts about the organization's sustainability have contributed to its prolonged sell-off that began in late 2013.
Lastly, Torm is an organization managing around 90 oil tankers, facing inconsistency in demand for crude and associated petroleum products since the need for these services fluctuates on market trends. As a result, Torm's dividend payments remain unstable, just sharing a portion of its net profits, regardless of their level.
While this inconsistency isn't necessarily problematic, it might be difficult for many investors to accept. This uncertainty might explain Torm's 40% price drop from its June peak when crude prices began their retracement.
Nothing out of the ordinary
This isn't to say every investor should categorically disregard these stocks. A compelling opportunity might emerge for someone who's willing to accept the risk or can identify a bullish scenario that others overlook.
However, for most investors, these Nasdaq-traded firms carry more risk than they're worth. The risk is a mix of weakened dividend payouts as well as a long-term capital loss.
Ultimately, the lesson to be learned from this story is that if something appears too good to be true, it probably is. Thoughtful stock evaluation demands cautiousness to ensure you're aware of any potential drawbacks before making a move.
In the context of careful investing, it's crucial to scrutinize the potential risks associated with stocks offering high dividend yields, such as Icahn Enterprises, AGNC Investment, and Torm PLC. These high yields might not be sustainable in the long term, posing a risk to your investment capital.
Given the unpredictable nature of these stocks, one should approach investments in them with caution, considering the potential for weakened dividend payouts and a possible long-term capital loss. This wariness is an essential aspect of thoughtful stock evaluation, ensuring you're fully aware of any potential drawbacks before making an investment decision.
