The Hidden Danger Lurking in Some High-Yield Dividend Stocks

I love dividend stocks, but my approach to this investment theme has changed over the years. When I was younger and had less responsibility, I focused on buying stocks with dividend yields of 10% or higher. I used some techniques to limit my downside risk and diversified, so I made out OK. However, I also learned some important lessons.

If you are looking at stocks with ultra-high yields like Annaly Capital (NYSE: NLY), AGNC Investment (NASDAQ: AGNC), Ares Capital (NASDAQ: ARCC), or even Conagra (NYSE: CAG), here are things you should consider before you buy.

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AGNC and Annaly have a history to tell

AGNC and Annaly are both mortgage real estate investment trusts (REITs) with yields over 10%. They are both well-respected companies in this unique niche of the REIT sector. For the most part, they fund their dividends by purchasing bond-like securities created by pooling mortgages. They both make use of leverage to amplify returns. Interest rates, housing market dynamics, and repayment rates are just some of the factors that can impact mortgage REITs. You need to do a little more homework if you are going to buy a mortgage REIT because they operate very differently from property-owning REITs.

That said, there is one very important factor that dividend investors need to understand: mortgage REIT dividends are inherently volatile. The share price of an mREIT will likely track its dividend, rising and falling over time. That will likely keep the yield high, but it could result in capital losses. The most recent dividend downtrend for these mREITs has been particularly long.

AGNC data by YCharts

Meanwhile, the shift toward a rising rate bias at the Federal Reserve, coupled with the central bank's plan to shrink its balance sheet, could be a headwind for AGNC and Annaly over the near term. Over the long-term, however, these changes could improve the business outlook. But a dividend cut at one of these two mREITs wouldn't be a shock if rates move higher. If you need reliable dividends to pay your bills, mREITs probably aren't a great fit for your portfolio.

Ares Capital makes high-risk loans

Ares Capital is a business development company (BDC). It is one of the largest BDCs and is also a well-respected business. However, the core business model is to make high-interest rate loans to smaller businesses. That is inherently risky. In the first quarter of 2026, its average loan carried an interest rate of 10.3%. That helps the stock support its over 10% yield, but there's a material risk here to consider.

Smaller companies often struggle to repay their loans during recessions. Rate increases can also increase the percentage of the portfolio that isn't paying. Right now, Ares Capital's non-accrual loans sit at 2.1%, up from 1.8% a year ago. That's not a big change, but it is a change in the wrong direction. And with rates likely to move higher in the near term, investment risk is rising for dividend investors, not falling. Like AGNC and Annaly, Ares Capital's dividend history is volatile.

ARCC data by YCharts

If you can't handle a dividend that rises and falls over time, you probably shouldn't buy a BDC. That means ultra-high-yield Ares Capital won't be a good fit for you.

Conagra is the highest-yielding S&P 500 stock

Conagra is a consumer staples company, a sector that's typically known for paying reliable dividends. However, the food maker's 10% yield is a warning that the dividend is at risk. For starters, the company isn't hitting on all cylinders today. The food industry is also facing material headwinds, with changing consumer tastes and regulatory uncertainty. Meanwhile, Conagra has significant leverage.

In truth, the company appears to be able to cover its dividend. Adjusted earnings in the fiscal third quarter of 2026 came in at $0.39 per share, and the dividend paid in the quarter was $0.35. That's tight, but manageable.

The problem is the company's elevated leverage at a time when rates seem likely to rise. Rate increases would lead to higher interest costs at a time when Conagra's core business is going through a rough patch. And, to make matters worse, the company just installed a new CEO. New CEOs often get as much bad news, such as dividend cuts, out of the way as quickly as possible so they can work with a clean slate. Having been burned by the arrival of a new CEO more than once myself, I would tread with caution with Conagra right now.

Know what you are getting into before you buy

For reference, I've been burned by high-yielding mREITs, BDCs, and regular old dividend stocks myself. If you do go this route, diversify widely. I also benefited from setting a dollar limit on my investments, which limited my upside but also limited how much I could lose on any single investment.

Buying stocks with ultra-high yields is an aggressive investment approach. While I once did that, I no longer do. With a family and more responsibilities, I need more dividend security. If you do look at stocks like AGNC, Annaly, Ares Capital, and Conagra, make sure you go in with your eyes open to the very real risk of a dividend cut.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Ares Capital. The Motley Fool has a disclosure policy.