High-yield dividend stocks are very popular amongst investors interested in building a regular stream of passive income. At least that’s what I’ve seen. These stocks seem like an easy source of money.

But it’s far from a risk-free investment option for my portfolio, especially if I haven’t correctly researched my stocks. After all, a rising dividend yield can easily be caused by a falling stock price that would wipe out any potential dividend gains. So let’s take a look at some of the things I check when investing in high-yield dividend stocks.

How I pick high-yield dividend stocks

When choosing the best high-yield dividend stocks to invest in, I look for the following trends in the underlying company’s financials.

• Earnings Growth – An ongoing trend of a company’s growth in earnings shows it is achieving good performance. Hence, it may be able to pay a more significant yield.
• Healthy Cash Flow – Seeing plenty of cash flowing into a business is a sign of a company’s ability to afford higher yields.
• Dividend Growth – A three to five-year growth trend in actual payouts might indicate the firm is confident in its ability to continue to pay dividends in the future.
• Debt to equity ratio – A low debt to equity ratio is always good in my eyes. It means less income is spent on interest payments, and more cash is available for dividends.

Which high-yield dividend stocks am I looking at?

The fortune 500 company ONEOK Inc (NYSE:OKE)is one of my top picks among High-yield dividend stocks. The owner of one of the nation’s premier natural gas liquids systems has recently announced a dividend of $0.94 per share. This makes the annual dividend yield more than 7%. But fluctuating commodity prices are a major risk the company faces. In fact, this is why the firm’s earnings have declined over the past two years. But with demand back on the rise, I feel confident that profits can return to their former glory, especially when looking at the latest set of results.

Philip Morris International (NYSE:PM)is my next pick for high-yield dividend stocks. The world’s leading international tobacco company paid a dividend of $1.2 per share in its latest quarter. This places its yield at around 5%. Phillip Morris has a long history of regularly paying dividends which have been steadily increasing over time, thanks to the addictive nature of its products. 

However, despite a good record of earnings growth, the company faces mounting pressure regarding the health impact caused by cigarettes. Its latest IQOS device has mitigated this impact since it reduces the level of harmful chemicals. But this will remain a prominent risk that may disrupt future dividends. Personally, I remain confident that the management team can overcome this hurdle.

Amongst high-dividend yield stocks, mortgage real estate investment trust Annaly Capital Management (NYSE:NLY) cannot be left out of my list. This mortgage REIT recently declared a dividend of $0.22 per share. It offers one of the best yields I’ve come across at more than 10%. REITs are often a common source of high yields as they deliver 90% of their earnings to shareholders using dividends.

But I have to watch out for the way Annaly handles business which is different from other REITs. It invests in pools of mortgages instead of purchasing properties. This makes this high-yield dividend stock a bit tricky to understand and needs more research on my part to understand the risks.

Wrapping It Up

High-yield dividend stocks can be an attractive investment. But, they can also be a trap. After all, if a company cannot sustain its yield, the payouts are likely to get cut. That’s why I think it’s vital to understand the background financials of the underlying business.