Should You Buy 3 of the Highest-Paying Dividend Stocks in the Nasdaq?

We investors, especially newish investors, are often drawn to certain kinds of investments, not always with good results. When I was a new investor, for example, I got excited about a mutual fund that had gained around 82% in a single year. So I bought shares. Well, of course, it didn't repeat that.

Similarly, some might be drawn to stocks with enormous dividend yields. That's a potential blunder. Here's why you need to be careful with steep yields -- along with a look at three stocks that have some.

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Hooray for dividends!

Let's not throw the baby out with the bath here, because in general, investing in dividend-paying stocks is a smart move. Check out the returns below:

Data source: Ned Davis Research and Hartford Funds.

Clearly, dividend-paying stocks can be powerful performers. That's partly because they will have generally grown to a respectable size, with fairly dependable cash flows, before they commit to paying a dividend.

High dividend yields: Good or bad?

What's so worrisome about a big dividend yield? Well, let's do a quick review of the math involved. A company's dividend yield is simply the amount it pays out over the course of a year in dividends divided by its current stock price.

As an example, let's a stock currently pays $1.28 per share per quarter in dividends -- so $5.12 over the course of a year. And its share price is $163. Divide 5.12 by 163 and you get 0.031 -- which is the same as 3.1%. So the stock's yield is 3.1%.

Now imagine that company runs into trouble and its stock plunges -- to, say, $80 per share. If its dividend remains at $5.12 per year, we would divide that 5.12 by 80 and we'd get a dividend yield of 6.4%. It's a higher yield, which looks great, but if a stock is going down, that could signal trouble for the company or the dividend payout.

The critical investing concept to learn here is that as a stock's price falls, its dividend yield will go up -- and vice versa -- simply because of math. Meanwhile, a company in trouble might reduce or even eliminate its dividend. While the dividend remains unchanged, the yield changes every time the stock goes up or down.

Now let's look at three of the highest-yielding stocks trading on the Nasdaq Stock Market. When I searched for them, I focused on mid-sized or large companies, with market values above roughly $2 billion.

1. Icahn Enterprises LP

First up is Icahn Enterprises LP (NASDAQ: IEP), recently yielding a whopping 31.2%. Invest $100 in the stock and collect more than $30 in a year! What's not to love, right?

Well, consider that the stock is down 45% over the past year and 77% over the past five years. It hasn't been a stellar performer.

IEP data by YCharts

Note that the company is named for billionaire investor (and activist investor) Carl Icahn, who recently owned more than 85% of the company.

Know, too, that the company is organized as a master limited partnership (MLP), which can make things complicated when it comes to taxes. (For example, MLPs issue K-1 schedules annually, which need to be incorporated in your tax return.) My Motley Fool colleague Anders Bylund in September noted that "Carl Icahn runs a risky business," investing in troubled companies and trying to turn them around.

The company could turn out to be a solid investment, but it does have some meaningful risks and you'll need to do your research before trying to jump on its juicy yield.

2. AGNC Investment

AGNC Investment (NASDAQ: AGNC) recently sported a portly dividend yield of 14%. It's a real estate investment trust (REIT), but it's not the usual kind of REIT that buys up many real estate properties and then leases them out. Instead, it's another kind of REIT, one that invests in mortgage-backed securities.

These "mREITs" originate and/or purchase mortgages or securities based on mortgages. They focus on real estate financing, not on the real estate itself. Mortgage REITs face many risks, though, such as changing interest rates, borrowers prepaying or refinancing their loans, borrowers defaulting on loans, and so on.

AGNC's trailing returns have not been terrible. Year to date, the stock was recently up 22%, and its five-year average annual gain was 8.3%. But it's the future that matters when it comes to investing, not past returns. You might invest in the stock for the fat payout, but you'll have to keep an eye on it. The payout appears sustainable for now, but mREITs in general are complex and can be volatile.

3. ZoomInfo Technologies

ZoomInfo Technologies (NASDAQ: ZI) is another steep yielder, with a recent yield of 12%. It's a company offering a cloud-computing platform for "go-to-market software, data, and intelligence solutions for sales, marketing, operations, and recruiting teams."

A look at its trailing returns explains why the dividend yield is so steep: Over the past year, shares are down about 34%. Over the past three years, on average, they're down 43%.

Shares of ZoomInfo actually popped recently, surging 24% when the company posted better-than-expected earnings. That fourth-quarter report still featured revenue down 2% year over year. If ZoomInfo keeps releasing better-than-expected results, it could be a good investment. But that's far from a sure thing. Personally, I'd rather invest in more proven businesses.

It's fine to consider steep yielders, as some may perform well. But research them thoroughly first. Or stick with less eye-popping dividend yielders -- which may be growing their dividends more briskly.

Don’t miss this second chance at a potentially lucrative opportunity

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*Stock Advisor returns as of March 18, 2025

Selena Maranjian has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.