Big dividends, bigger losses? The hidden risk in Wall Street's highest-yielding stocks

The S&P 500 has gained 12.8% this year through October 29, while the technology-heavy Nasdaq Composite has risen 12.7%. The Dow Jones Industrial Average is up 8.9%, while the smallcap Russell 2000 has outperformed with a 15.2% gain.The rally has been supported by corporate earnings and enthusiasm surrounding artificial intelligence, although higher interest rates, geopolitical tensions and rising energy prices have periodically unsettled investors.Live EventsThe US 10-year Treasury yield stood at 4.98% on October 29, reflecting elevated borrowing costs.

Against this backdrop, dividend yields exceeding 10% have attracted attention from income-seeking investors.Two mortgage REITs offer yields above 16%. Annaly Capital Management, with a market capitalisation of $14.5 billion, tops the list with a dividend yield of 16.24%.The mortgage real estate investment trust, which primarily invests in mortgage-backed securities, has a payout ratio of 75.83% based on earnings per share.

However, its share price has declined 45.3% over the past five years, while annual dividend growth has been negative at 3.8%.AGNC Investment follows closely with a dividend yield of 16.09% and a market capitalisation of $11.3 billion. The company has a payout ratio of 77%, but its shares have fallen 44.7% over five years. Dividend growth during the period has remained flat.Both companies operate in the mortgage investment business, where changes in interest rates, funding costs and mortgage-backed securities valuations can significantly influence earnings and book values.

Their high yields also reflect the mathematical effect of falling share prices, which push dividend yields higher even when distributions remain unchanged.Financial stocks offer double-digit payoutsBusiness development companies, or BDCs, account for several other high-yielding names. Blackstone Secured Lending Fund offers a dividend yield of 13.1%, followed by Blue Owl Capital Corporation at 12% and Ares Capital Corporation at 10.04%.These companies primarily provide financing to businesses, including middle-market borrowers that may have limited access to traditional bank funding.

Their dividend yields are considerably higher than those of most large US companies.However, their share-price performances have been mixed. Blackstone Secured Lending has declined 14.5% over five years, while Blue Owl Capital Corporation has fallen 27.1%. Ares Capital has performed relatively better, declining 8.6%.The payout ratios calculated against earnings per share stand at 243.24% for Blackstone Secured Lending, 240.58% for Blue Owl Capital Corporation and 138% for Ares Capital.Energy companies offer a different pictureEnergy partnerships present a different picture, with some combining high dividend yields and substantial share-price appreciation.

Western Midstream Partners offers an 8.12% yield and has delivered a 108.9% share-price return over the past five years.MPLX, another energy infrastructure partnership, offers a yield of 7.2%, while its shares have gained 94.8% over the same period. Plains All American Pipeline has performed even better, advancing 132.6% in five years while offering a dividend yield of 6.3%.These businesses generate income from transporting, processing and storing oil, natural gas and related products.

Their distribution capacity depends on operating cash flows, contractual arrangements, capital expenditure and debt obligations.Unlike ordinary corporations, many energy master limited partnerships distribute cash to unitholders under structures that can have different tax implications.Consumer giants also featureSome familiar American consumer companies are also offering unusually high dividend yields.

General Mills, the maker of Cheerios and other packaged food brands, offers a yield of 7.32%.However, its shares have declined 47.2% over five years, highlighting the pressure faced by established consumer businesses. Kraft Heinz offers a yield of 6.69%, while its share price has fallen 39.5% during the period.Among real estate companies, Gaming and Leisure Properties offers an 8.31% dividend yield, while VICI Properties offers 7.5%.

Their share prices have declined 20% and 22.2%, respectively, over five years.Are high dividend yields worth chasing?The performance of these companies highlights an important distinction between dividend income and overall investment returns. Dividend yield measures the annual dividend relative to the current share price. A declining stock price can therefore make a company's yield look increasingly attractive, even when its financial prospects have weakened.For example, a stock yielding 16% can still deliver a negative overall return if its market value declines sharply or its dividend is reduced.

At the same time, a company with a lower dividend yield can generate superior wealth creation when distributions are supported by growing earnings and rising share prices.The five-year price returns in this analysis exclude dividends and distributions received by shareholders. They should therefore not be treated as total investment returns.Investors assessing high-yield stocks need to examine dividend coverage, free cash flow, debt levels and the sustainability of future payments.

These factors are particularly important for mortgage REITs, BDCs and highly leveraged businesses, where earnings can fluctuate significantly with interest rates and economic conditions.(You can now subscribe to our ETMarkets WhatsApp channel)