Dividends - The Ultimate Form of Passive Income
Dividends are a passive income dream. Think of all the ways you've been told you can make passive income: you can start a blog (sup), you can start your own company or buy an existing one and build it to the point where you no longer need to be involved in the day-to-day. You could sell an online product or start drop-shipping, but none of these are truly "passive." They require a hell of a lot of start-up effort; a "push" to get the flywheel spinning. Once that wheel spins faster and faster, it no longer needs you to put the same amount of effort in, which is where the passiveness begins to kick in.
Dividends are typically the passive income goal, because they're truly passive. You can buy a stock or an ETF that pays a dividend yield and then...do nothing. You don't have to attend shareholder meetings or submit votes or even take to Twitter to be really fucking annoying about owning the stock; you can just sit back, relax and let the money roll in.
Today, I'm going to cover the five highest dividend yielding stocks in the world, as well as what they do to be able to payout these princely sums to shareholders. Make sure to stick around until the very end, because I'll let you know the best strategy to owning these stocks and living on those sweet, sweet dividends. But let's start with Number 5:
5. Star Bulk Carriers - 23.38% Dividend Yield
Star Bulk Carriers (SBLK) is a Greek shipping company that specializes in the transport of dry goods like iron ore, fertilizer, coal and grain. The company has been around since 2006, but their dividend just started in Q4 of 2019 and then they took a 15 month break between February 2020 and May 2021, so it doesn't give us much of a track record to look at.
The company has accelerated their dividend since they restarted payments in mid-2021, with their yield more than doubling every subsequent quarter. The company is now sitting at a little over 23% dividend yield for this past payout in December 2021, but based on their recent history, there's no telling where this one is headed. Analysts also seem to view this one surprisingly favorably, with an analyst consensus "Buy" rating applied to the company over the next 12 months.
4. The Korea Fund - 26.80% Dividend Yield
The Korea Fund (KF) is an American-based fund that invests in Korean-based companies, allowing Americans exposure to companies on the Korean exchange without having to purchase ADR's. However, investors are subject to a LUDICROUS 1.25% expense ratio.
The Korea Fund pays an annual dividend to shareholders, rather than the more common quarterly dividend payout, so this one may not be great for regular income seekers. The company has been paying an annual dividend for four years with an ex-dividend date consistently in December, and the absolute payout currently sitting at $9.11 per share. Over the last three years, the divided has seen a 74% increase, but the yield has fluctuated up and down pretty radically recently.
3. Golden Ocean Group - 37.65% Dividend Yield
Golden Ocean Group is another shipping and transportation company, similar to Star Bulk Carriers, but this one is based in Bermuda. Started in 1996, the company now has 92 ships around the world to ferry materials on a daily basis around the world, as well as license out their boats to other companies for a licensing fee to increase revenue.
This company has the longest dividend track record on the list so far, being able to track their quarterly payouts all the way back to 2013. However, the company's payout ratios have differed wildly over the years. The last three years has seen dividends grow by 255%, with Golden Ocean Group now paying out $3.40 per share per year to shareholders.
2. SuRo Capital - 63.64% Dividend Yield
SuRo Capital (SSSS) is an American closed-end investment firm that specializes in investing in late-stage private companies. Theoretically, this is an extremely risky space that provides tremendous upside, which is what allows the company to pay out such a remarkable dividend yield.
The dividend payout dates back to 2019, and is a quarterly yield to investors. However, the yield has wavered considerably since 2019, ranging from a 4.8% yield in July 2020 to 198% in May 2021 that was issued as a special dividend payout. Payouts are all over the map, but at least they're quarterly...
1. Retail Value Inc. - 676.07% Dividend Yield
Retail Value Inc (RVI) is an American operator of retail real estate, making this our first real estate investment trust (REIT). Retail Value Inc has paid out annual dividends since 2019, but they did pay a special dividend in 2018 prior to the establishing of their scheduled dividend payout.
Their most recent scheduled dividend payout was October 2021 in which they paid out a massive $22.04 per share payment to shareholders.
How Dividends Lie To You
Did you notice above that I really had a tough time describing these companies and their payout ratios? That's because I wanted to really save this section to teach you a quick lesson on dividends: DO EXTENSIVE RESEARCH BEFORE YOU INVEST.
Dividends, to put it frankly, can be bullshit. Let's take Retail Value Inc for a moment. Let's say you have saved $1 million for retirement, and you want to live on dividends. You take that $1 million and see a 676% dividend yield, so you put all of your money in there, expecting an annual payout of over $6 million. Well my friend, you're going to be in for a world of pain.
Let's talk about how dividend yield is calculated. Dividend yield is the payout divided by the share price, which results in the total dividend yield that's printed on the ol' prospectus.
In October 2021, Retail Value Inc experienced a large retail sale, which provided to them an influx of cash. Due to federal regulations around REIT's and how much they have to distribute to shareholders via dividends, the company issued a dividend of $22.04. Promptly after paying this to their shareholders, their investors ran for the hills, which resulted in a sharp sell-off of the company and tanked their share price from $27 to $6 basically overnight. Thanks to the nature of the dividend yield calculation, the yield skyrocketed to 676%. This is how dividends can lie to you.
What To Look For When Buying Dividend-Yielding Companies
A Strong Track Record
Looking for dividends is like looking for anything else: you want to judge them based on their track record. Typically, companies that have a massive yield and a very short track record won't be the best investment. You want to look for companies that have been in the dividend game for a long time, or that have recently started issuing dividends but have more down-to-earth yields that are somewhat sustainable.
The best place to start looking is at the list of what are called "Dividend Aristocrats." A dividend aristocrat is a company in the S&P 500 that issues a dividend, and has increased that divided consistently over the past 25 years. This shows to investors that the company is strong, sustainable, smart with their capital management and effective in returning shareholder value. The companies, to put it plainly, are not lying to you with their dividends.
This brings us to Payout Ratios.
The Payout Ratios
So how can you spot a company that is sustainable in its dividend? Do you look at the total payout dollar amount? Do you look at if the dividend is quarterly or annual? Try starting with the payout ratio.
The payout ratio is the total amount of dividends paid out to shareholders, expressed as a percentage of the net income of the company. Essentially, it's showing the amount of money that the company is allocating to dividend payouts versus allocating to itself for things like research and development, more employees, bonuses and the like.
You want to look at this number for two reasons:
To make sure the company has room to grow. You typically don't just want dividend appreciation, but capital appreciation as well. You want to make sure that the company you're investing in has enough cash on hand to be able to expand and grow consistently. Additionally,
You want to make sure that the company is not paying more in dividends than it has cash on hand.
Point #2 might sound like an idiotic one to make, but take the five companies I outlined as examples. Of those five, only one (SuRo Capital) has a payout ratio under 100%. They are the only one above that has the actual cash on hand to be able to pay their dividends. Think about it like this: would you lend your friend money knowing that they couldn't pay you back on a payment plan? It's the same exact thought to dividends.
The Bottom Line
Look, this article is not meant to be a comprehensive tutorial on dividend investing (though I can certainly write one of those if you're interested). This article is meant to serve as a warning: do your research before allocating your hard-earned money to a stock, especially if the dividend yield seems unusually high. If it looks too good to be true, then it probably is!
When you're investing your money in dividend payers to chase that true "passive income" vibe, make sure that you're not just throwing your cash at a high number. Make sure you're actually investing in a quality company that has a plan and a track record of consistent, sustainable dividends, and then keep an eye on them. Even the best, most stable companies can suspend their dividends in times of crisis (The Walt Disney Company, anyone?). Dividends are not guaranteed, so keep them on a short leash. The rest is up to you.
Do you invest in dividend yielding companies? Why or why not? Let me know in the comments below! And don't forget to sign up for my email list so you never miss a post. Thanks for reading!