Buying stocks based on one aspect of a company is a mistake, but often investors become fixated. For example, income-oriented investors often give too much influence on dividend yields in their investment decisions. That could be a mistake. Take three of the highest yields in the S&P500 index as a starting point. Altria (NYSE:MO), AT&T (NYSE:T)And Healthpeak properties (NYSE: DOC) have huge returns, but they all have warts, and it looks like it could be a terrible long-term investment. Here’s what you need to know before you buy one.
Altria: Avoid companies that are dying
Altria has a huge dividend yield of 9.3%. It has been increasing its dividend regularly for years. It comes from the consumer staples sector, which is generally considered a conservative part of the market. It also has a dominant position in the market it serves thanks to its ownership of an iconic brand, Marlboro. That last fact is actually the problem.
Altria is a tobacco company that sells cigarettes in the United States, where smoking is increasingly frowned upon. To put a figure on that: the company produced 76.3 billion cigarettes in 2023, compared to 101.8 billion cigarettes in 2019. That’s a drop of 25% in just five years! The company has managed to offset the impact of the volume decline by steadily increasing prices. But at some point, price increases are likely to exacerbate the decline. Most investors would be better off avoiding a company that appears to be in decline over the long term.
AT&T has a dominant position, but a lot of debt
AT&T has a significant dividend yield of 6.7%. It has been increasing its dividend annually for years. It is one of a small number of large, dominant mobile communications providers in the United States. The coverage network is large and it would be difficult and expensive for a start-up company to replace it. In other words, AT&T has an entrenched position in a company that attracts a large group of loyal customers who happily and reliably pay their monthly cell phone payments. AT&T generates a lot of cash flow to support its dividend.
The problem with AT&T’s business is that it is capital intensive. Not only was it expensive to build, but the company must maintain and upgrade it as cell phone technology advances. This has placed a heavy strain on AT&T’s balance sheet. While the use of leverage is not unusual in the mobile phone industry, its debt-to-equity ratio of 1.3 times is not the lowest among the peer group and has increased by 40% over the past five years. While the dividend is likely safe, investors should understand that AT&T’s balance sheet requires close monitoring.
Healthpeak Properties is designed to pay dividends
Healthpeak Properties is a bit different from the other two stocks here because it is a real estate investment trust (REIT). This is a corporate structure specifically designed to pass income from institutional-level rental properties to investors in a tax-efficient manner. The high dividend yield of 6.6% is not that unusual in the REIT space. However, it is still important to understand what exactly Healthpeak Properties does.
This REIT, as the name implies, owns medical properties, specifically medical offices and medical research facilities. Given the increasing size of the older age groups, this should be an attractive focus in the long term. However, purchasing real estate typically involves using debt, and interest rates have been rising recently. That will lead to higher operating costs, a fact that has investors concerned about near-term performance. Fourth quarter 2023 financial results were essentially flat year over year. So there is cause for concern, but over time it seems very likely that Healthpeak’s business focus will allow the company to continue paying a reliable and significant dividend.
One to avoid, two to learn about
Ultimately, most investors will likely want to avoid Altria’s high-yield, slowly dying businesses. AT&T and Healthpeak are much better companies to spend your valuable time researching. That said, both high-yield stocks face short-term issues, but in the long term their strong operations will likely allow them to continue paying dividend investors well because they hang in there.
Should You Invest $1,000 in Altria Group Now?
Consider the following before purchasing shares in Altria Group:
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Healthpeak Properties. The Motley Fool has a disclosure policy.
Should you buy the three highest-paying dividend stocks in the S&P 500? was originally published by The Motley Fool
