Shipping stocks offer dividend yields of 10%, 20%, and in some cases even 30% or more. But you'll need to do some digging, as some of the best deals are often found among the lesser-known names.

Finding juicy dividend yields on tanker stocks is the easy part. After all, companies in this industry sport an average dividend yield of 6.6% and rising. However, the most difficult task for investors is NOT finding companies that pay the highest dividend yields. After all, that can be accomplished in minutes by using a simple screening tool. Instead, investors need to uncover high-quality shipping firms that are generating sufficient cash flows to keep paying dividends at a steady or increasing rate year after year.

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Tanker stocks have been in a downtrend since March, and most are currently trading near their 52-week lows. The silver lining for income investors is that the recent pullback in share prices has caused yields to soar.

Is now the opportune time to lock in a yield of 10%, 20%, or even 30% on these stocks?

On select stocks, maybe. The key is to find those with solid earnings visibility. And for shippers, the key to earnings is shipping rates.

What Drives Shipping Rates?
The answer is simply supply and demand -- the supply of ships and the demand for the products they carry. The delicate balance between supply and demand makes for extremely volatile shipping rates.

Over the past five years, day rates for very large crude oil carriers (VLCCs), for example, have swung from a low of about $15,000 per day to a peak last November of $250,000 a day. Last year, the average daily price was a healthy $96,000, but so far this year the average has been about half that rate.

Industry analysts are divided about what the future holds, but many expect freight rates to remain stable over the next few years. In its latest report on global shipping, credit rating firm Standard & Poor's gave stable ratings to 80% of the 27 shipping firms in its universe, adding that it expects freight rates to remain above historical averages in the coming months.

On the other hand, the bears insist that a pending slowdown in Chinese demand for oil and other raw materials will send shipping rates lower. However, so far China's robust economy has defied expectations. It expanded +9.4% in the latest quarter, following a +9.5% increase the prior period -- a pace that should help keep a floor on shipping rates.

A growing supply of ships -- the global tanker fleet is expected to grow by about +25% in the next two to three years -- could also weigh on freight rates. However, strong demand could help soak up this extra fleet capacity, keeping prices stable.

In fact, freight rates have already bounced higher and are expected to remain strong for the next 12 to 18 months, thanks to supply disruptions caused by Hurricanes Katrina and Rita. As the domestic need for refined products like gasoline, diesel, and jet fuel has strengthened, so too has demand for tankers carrying these products into the U.S. That increased demand has translated directly into higher prices.

Still, given the uncertain outlook of this highly cyclical industry, investors may want to look carefully before jumping aboard.

Play It Safe
When investing in shipping stocks, you can save yourself a lot of potential pain by first asking a few key questions about each prospective investment. To begin, you might consider asking if the firm operates on the spot market or under longer-term contracts. For instance, shippers like Nordic American Tanker Shipping (NAT) that operate on the spot market offer the most upside potential, but they're also exposed to the greatest risk should rates begin to fall. For more conservative investors, the safest plays among these highly volatile stocks are firms that operate under longer-term charters.

Next, it is also a good idea to check out each stock's performance and dividend history. For example, the share price of a highly volatile stock like Frontline (FRO), the world's biggest crude oil shipper, has gyrated wildly from a peak of $64.20 to a bottom of $35.89 over the past 52 weeks alone. Its dividend payments are equally unpredictable, with $4.45 paid in 2003, $22.14 in 2004, and just $14.46 so far this year -- at irregular intervals.

By contrast, the various shipping companies that I will profile later in this article offer some of the most stable dividends to be found in this group. Each also sports a share price that has stayed within a fairly narrow trading range, and all follow a managed dividend policy, with regular quarterly distributions that have steadily increased in line with earnings.

Of some 40 tanker stocks on the market, about one-third of them offer above-average yields of 4%-plus. To view a table of these companies, as well as an in-depth look at my three favorite shipping stocks, you'll need to visit one of the links below...

Important Note:  To view the remainder of this article, in which Carla Pasternak provides a table of more than a dozen high-yielding shipping stocks, as well as an in-depth analysis of her three favorite stocks from this list, you'll need to subscribe to our premium High-Yield Investing newsletter. After you subscribe you'll receive immediate access to the remainder of this article, as well as our monthly High-Yield Investing newsletter and a host of additional premium content. Please visit one of the following links to continue...

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