Dividend stocks help you to make money with no effort on your part. And that passive income can be incredibly powerful if it’s reinvested long-term and piles up over the years. It’s also a big part of why high-yielding dividend stocks can be particularly enticing, as they provide investors with more bang for their investment bucks.
But high yields also tend to come with increased risk. Three of the highest-yielding dividend payers among stocks in the S&P 500 today are Walgreens Boots Alliance (NASDAQ: WBA), Altria Group (NYSE: MO), and Verizon Communications (NYSE: VZ). These stocks provide plenty of dividend income for investors right now compared to the S&P 500 average. But their yields are high for a reason (or multiple reasons) which isn’t necessarily good.
Is it worth adding these three S&P 500 dividend payers to your portfolio today? Or is there too much risk involved with their high payouts?
1. Walgreens Boots Alliance: 6.3% dividend yield
Walgreens’ dividend is one of the main reasons investors have owned shares of the pharmacy retailer over the years. It’s also why the stock has been a bad buy of late. Investors grew concerned that the payout wasn’t sustainable.
At the start of the year, management confirmed the worst when it announced a dividend cut, slashing the quarterly dividend by 48%. Up to that point, the stock had an annual dividend growth streak going which spanned decades. It was on track to be a Dividend King in a few years.
Unfortunately, even with the reduced dividend, investors shouldn’t have much confidence that the reduced payout is sustainable. In the trailing 12 months, Walgreens incurred an operating loss of more than $2 billion. Going forward, it faces a tough road as it continues investing in a costly plan to open hundreds of primary care clinics at its retail locations.
The stock hasn’t been this cheap for decades, and there’s good reason for it — Walgreens comes with massive risk right now, and it’s not a stock dividend investors should feel comfortable relying on.
2. Altria: 8.4% dividend yield
Tobacco giant Altria entices investors with an even higher yield on its dividend payouts. Unlike Walgreens, it continues to increase its dividend annually. Last year, the company boosted its quarterly payout by 4.3%, marking the 58th dividend hike it has made in 54 years. As with Walgreens, the dividend provided a big reason for investing in an income stock that didn’t have much in the way of stock price appreciation.
There are some warning signs to consider with this dividend payer. The company’s payout ratio is a bit high at more than 80% of earnings (although it has been at this level for several years now). Altria’s revenue has also declined for the past two years, and that seems to be the case again this year. In the first quarter, net revenue was down 2.5% year over year.
Altria is trying to transition to new revenue streams to replace the shrinking revenue from cigarette sales and get its growth story going again. Consumers continue to move away from tobacco products. Recent data suggests that globally, just 1-in-5 adults use tobacco now, compared to 1-in-3 back in 2000.
While Altria’s dividend appears to be safe for the time being, it may only be a matter of time before it too has to consider reducing its payout. This is another risky stock that may not be suitable for income investors with a long-term investment mindset.
3. Verizon Communications: 6.5% dividend yield
Telecom giant Verizon hasn’t been increasing its dividend payments for as long as Altria, but it can rightly be called a solid dividend growth stock. Last year, it extended its streak of annual dividend increases to 17 years.
Its payout ratio sits at around 100% right now, which may be unnerving to income investors. But that ratio calculation was affected by a one-time $5.8 billion goodwill writedown in the fourth quarter which affected earnings. The more important metric to note is that Verizon generated $13.4 billion in free cash flow over the trailing 12 months, which exceeds the $11.1 billion it has paid out in dividends during that time. Free cash can be a better indicator of how sustainable a dividend is, since it excludes non-cash items such as impairment, as well as depreciation and amortization.
Although business isn’t taking off for Verizon by any stretch, the company does expect to see between 2% and 3.5% wireless service revenue growth this year.
The stock trades at just 9 times its expected future profits, making it an attractive value buy. Verizon’s business still looks to be in good shape, and it’s the only stock on this list I’d consider buying for the long haul.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
Is Now the Time to Buy 3 of the S&P 500’s Highest-Yielding Dividend Stocks? was originally published by The Motley Fool
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