While a diversified portfolio should include some enterprises that offer passive income, here’s the deal about high-yield dividend stocks: they’re risky as all heck. Usually, such companies represent yield traps, enticing investors with their seemingly robust income-making prospects. But under the hood, they suffer from severe fundamental vulnerabilities.
However, in other cases, speculative dividend stocks may stem from misunderstood businesses. Maybe they’re solid enterprises but fell under hard times for circumstances outside their control. Or, most investors don’t appreciate the forward-looking catalysts that may bolster returns. Either way, it’s possible to find diamonds in the rough. If you’re patient and can tolerate volatility, these high-risk high-reward stocks may be for you.
Devon Energy (DVN)
On paper, Devon Energy (NYSE:DVN) might seem too risky an idea for high-yield dividend stocks. With the hydrocarbon energy sector suffering under the weight of the Federal Reserve’s hawkish monetary policy, companies like Devon incurred significant red ink. For example, since the beginning of this year, DVN slipped more than 18% in equity value. Over the trailing one-year period, the stock declined over 11%.
Nevertheless, on a fundamental note, social normalization trends – such as the return to the office – may boost traffic volumes to pre-pandemic levels. While that might be a contentious topic, it’s also the reality. According to Axios, companies have aggressively pushed for at least hybrid schedules for their employees. Cynically, then, this framework should lift the hydrocarbon players.
As for the case for speculative dividend stocks, Devon makes a very compelling case. Right now, the energy giant carries a forward yield of 6.06%. That’s well above the energy sector’s average yield of 4.24%. Also, the payout ratio sits at 43.79%, translating to confidence in yield sustainability.
EPR Properties (EPR)
Structured as a real estate investment trust, EPR Properties (NYSE:EPR) focuses on entertainment businesses, such as cineplex operators and amusement parks. As a case for high-yield dividend stocks, EPR also seemingly suffers from a higher risk profile. After all, if the consumer economy suffers, companies levered to discretionary spending may plunge. While EPR got off to a blistering start this year, it’s down almost 4% in the trailing year.
Still, here’s the deal with EPR Properties. First, one major cloud of uncertainty has faded regarding the bankruptcy of Regal Cinemas, one of EPR’s largest tenants. With the two entities inking a new deal, investors now have an air of predictability. Second, the box office happens to be a great bang for the buck regarding entertainment value. Thus, EPR’s one of the high-risk high-reward stocks to consider.
Lastly, EPR carries a forward yield of 7.02%. In contrast, the real estate sector’s average yield is 4.46%. However, investors interested in speculative high-yield stocks should be aware that the payout ratio stands at just under 132%.
British American Tobacco (BTI)
Undeniably, British American Tobacco (NYSE:BTI) represents an extremely risky case for high-yield dividend stocks. Fundamentally, the prevalence of smoking prevalence around the world has declined. For an enterprise that features a presence in approximately 180 countries, that’s not exactly the stat investors would look for. If that wasn’t enough, BTI fell more than 18% since the beginning of this year.
Also, the red ink isn’t a fluky situation. In the trailing year, BTI fell nearly 19%. Over the past five years, shares stumbled more than 36%. While no one will mistake British American as a confidence-inspiring enterprise, it’s also one of the dividend stocks with high speculative returns.
Sure, smoking rates are falling practically everywhere. However, vaping rates have increased in their place. With British American commanding a strong portfolio of various vaping brands, it’s in a prime position to benefit.
Finally, BTI carries a forward yield of 8.5%, well above the consumer staple sector’s average yield of only 1.89%. As well, the payout ratio is 55.35%, a decently sustainable figure.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.