With dividend stocks, you can make money without any effort on your part. And that passive income can be incredibly powerful when it’s reinvested over the long term and accumulates over the years. It’s also a key reason why high-yield dividend stocks can be particularly attractive, as they offer investors better value for their money.
But high interest rates are usually also accompanied by increased risk. Three of the highest yielding dividend payers among stocks in the S&P500 are today Walgreens Boots Alliance (NASDAQ: WBA), Altria Group (NYSE:MO)And Verizon Communications (NYSE: VZ). These stocks currently offer investors ample dividend income compared to the S&P 500 average. But their yields are high for a reason (or several reasons) that aren’t necessarily good.
Is it worth adding these three S&P 500 dividend payers to your portfolio today? Or is there too much risk associated with their high payouts?
1. Walgreens Boots Alliance: 6.3% dividend yield
Walgreens’ dividend is one of the top reasons why investors have held shares of the pharmacy retailer over the years. That’s also why the stock has been a bad buy lately. Investors became concerned that the payout was not sustainable.
At the start of the year, management confirmed the worst when it announced a dividend cut, cutting the quarterly dividend by 48%. Until then, the stock had annual dividend growth that lasted for decades. It was on track to become a Dividend King within a few years.
Unfortunately, even with the lower dividend, investors shouldn’t have much confidence that the lower payout is sustainable. Over the next twelve months, Walgreens suffered an operating loss of more than $2 billion. Going forward, it faces a difficult road ahead as it continues to invest in a costly plan to open hundreds of primary care clinics at its retail locations.
The stock hasn’t been this cheap in decades, and there’s a good reason for that: Walgreens carries enormous risk right now, and it’s not a stock dividend that investors should feel comfortable with.
2. Altria: dividend yield of 8.4%
Tobacco giant Altria is luring investors with an even higher return on its dividend payments. Unlike Walgreens, it continues to increase its dividend annually. Last year, the company increased its quarterly payout by 4.3%, marking its 58th dividend increase in 54 years. As with Walgreens, the dividend was an important reason to invest in an income stock that didn’t have much in the way of price appreciation.
There are some warning signs to be aware of with this dividend payer. The company’s payout ratio is a bit high at over 80% of profits (although it has been at this level for several years). Altria’s turnover has also fallen over the past two years and that appears to be the case again this year. In the first quarter, net sales fell 2.5% year-on-year.
Altria is trying to pivot to new revenue streams to replace shrinking revenue from cigarette sales and restart its growth story. Consumers continue to move away from tobacco products. Recent data shows that globally only 1 in 5 adults now use tobacco, compared to 1 in 3 in 2000.
While Altria’s dividend seems safe for now, it may only be a matter of time before Altria too has to consider cutting its payout. This is another risky stock that may not be suitable for income investors with a long-term investing 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.
The payout ratio is currently around 100%, which can be unnerving for income investors. But that ratio calculation was affected by a one-time $5.8 billion write-down of goodwill in the fourth quarter, which affected earnings. The key metric to note is that Verizon generated $13.4 billion in free cash flow over the last twelve months, which is more than the $11.1 billion it paid out in dividends in that period. Free cash can be a better indicator of how sustainable a dividend is because it excludes non-cash items such as impairment and depreciation.
While things are by no means taking off for Verizon, the company does expect wireless revenue growth of between 2% and 3.5% this year.
The stock trades at just nine times expected forward earnings, making it an attractive buy. Verizon’s business still looks good, and it’s the only stock on this list that I would consider buying for the long term.
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David Jagielski has no position in the stocks mentioned. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
Is Now the Time to Buy Three of the S&P 500’s Highest-Yielding Dividend Stocks? was originally published by The Motley Fool
