Generous dividends can help you build wealth in the long run. At the same time, overly generous dividend yields may be a sign of deeply rooted financial struggles.
The Dogs of the Dow investing strategy relies on the business quality requirements of the Dow Jones Industrial Average(DJINDICES: ^DJI) If one of the 30 mighty Dow stocks is down on its luck, sending share prices lower and the effective dividend yield higher, that's surely a temporary issue. Buy while the dividend is high and wait for the Dow component to get over that speed bump.
But what if you apply the same philosophy to a much broader universe of stocks? There are 1,730 stocks on the Nasdaq(NASDAQ: NDAQ) stock exchange with a market cap of $200 million or more. Are the top-yielding dividend policies in this large group green flags on fantastic buying opportunities -- or red flags marking companies in deep trouble?
Let's find out. Here are the three richest dividend yields on the Nasdaq today, each with a quick analysis to separate the buying opportunities from the red-flag danger zones.
DouYu International: 62.9% dividend yield
Live-streaming e-sports specialist DouYu(NASDAQ: DOYU) is a special case. The China-based company isn't in the habit of paying quarterly dividends. But it issued a special dividend on Sept. 3, amounting to $9.76 per American depositary share (ADS). That amounts to 52% of DouYu's price per ADS on the eve of that disbursal.
The company took this extraordinary action to give shareholders something to celebrate despite heavy economic pressure on DouYu's business operations. Revenue has trended downward for nearly three years now, and the bottom-line earnings are printed in red ink.
DouYu's incredible dividend yield is a unique one-time item, not a dependable payout policy. You shouldn't expect the company to maintain this downright unreasonable yield. Instead, you should wonder why DouYu felt compelled to share so much cash with stockholders in 2024.
The ADS enjoyed a brief period of elevated pricing, starting with the dividend announcement and ending exactly when the payouts were issued. The market price is down by 96% from the all-time peak in early 2021.
The special dividend was paired with a refreshed buyback program. In the spring of 2024, DouYu rebalanced the ratio of ADS shares per underlying share on the Hong Kong exchange -- effectively the same thing as a reverse stock split to prop up a sliding stock price.
These are not the actions of a thriving business facing unfair investor pressure. I would hesitate to pick up DouYu stubs today, despite the massive price cuts. The company needs to restart its stalled revenue growth and start making money again. You may want to dig deeper in DouYu's story, but look away from the illusion of a monumental dividend yield to take a deeper look at other financial metrics. This is not a tempting "dogs of the Nasdaq" investment idea.
Icahn Enterprises: 37% dividend yield
This is a tricky one.
Billionaire Carl Icahn's investment empire, Icahn Enterprises(NASDAQ: IEP), shows a 37% dividend yield in many data sources. All of these sources report an asset price of $10.80 and a steady quarterly payout of $1.00 per depositary unit (the equivalent of a share in a limited partnership). That makes sense.
But the Icahn organization's master limited partnership (MLP) doesn't technically pay dividends to shareholders. Instead, it issues quarterly cash distributions to unitholders, with some subtle differences. There are tax advantages, a complex reduction of the unitholders' original cost basis as they collect dividends, and other quirks. These payouts are similar to dividends, but they aren't exactly the same.
That being said, Icahn's business really does offer quarterly payouts of $1.00 per unit, resulting in that massive yield figure, with MLP-related caveats and asterisks aplenty. The projected annual payout of $4.00 per unit is down from $6.00 in 2023, though.
The MLP structure comes with generous tax incentives but also requires that Icahn Enterprises pays out all "available cash" to its unit owners. In other words, those robust payouts will keep coming as long as Icahn's business empire is making cash profits. The yield is high these days, as unit prices plunged 48% lower over the past year.
Carl Icahn runs a risky business. He invests money in distressed businesses with low valuations and then attempts to help his targets execute a turnaround. Recently, Icahn Enterprises has started short-selling some stocks -- a potentially lucrative idea but also a risky one. And many of these high-stakes bets have resulted in painful losses lately.
The MLP itself is selling more units to raise extra cash and keep the business running. Very high dividend yields often belong to troubled businesses. The same idea applies to MLP units and distribution yields, too. I see a struggling investment firm here. While I wish Carl Icahn well in his activist investment adventures, I think it's best to watch this drama from the sidelines.
Torm: 19.1% dividend yield
Finally, let's check out Torm(NASDAQ: TRMD). As the operator of about 90 oil and gas tankers, the company faces radical changes to its target market as alternative energy sources and electric vehicles reduce the importance of fossil fuels.
But Torm is doing alright anyhow. Top-line sales are up 37% in three years while free cash flows more than tripled. Since Torm's official policy is to "distribute excess liquidity to shareholders on a quarterly basis," that means its payouts are up, too.
I'll admit that oil tankers are far from my field of expertise, but I do appreciate this company's strong cash generation and generous dividend strategy. I'm tempted to leave you with a third "not a buy" rating, given the anti-oil tendencies of global market trends. Still, perhaps a leader in this extinction-threatened industry could continue to collect solid cash flows and pay generous dividends for a few more years.
Don't bet the farm on this dead-end idea. However, Torm could be a solid investment in the shorter term. Just be prepared to cut loose from this stock if and when oil starts to lose its economic importance. It's a halfhearted "buy" at best. At the same time, it's the most bullish recommendation on this list.
I'm pretty sure you'd see plenty of bearish outcomes if I kept going down this list of ultra-high dividend yields on the Nasdaq. The dividend-based "dogs of the Dow" strategy doesn't look terribly useful when applied to a longer stock list with lower barriers to entry.
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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.
