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Should you buy the three highest-paying dividend stocks in the S&P 500?

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Should you buy the three highest-paying dividend stocks in the S&P 500?

There are two main ways to make money with stocks: price appreciation and dividends. The former is the simplest, but the latter can account for a significant portion of investors’ total returns.

On the surface, it makes sense that dividend-seeking investors would naturally choose the companies that offer the highest dividend yields, but a company’s dividend yield alone doesn’t tell the whole story. Other business factors must be taken into account.

Below are the S&P500‘s three best-paying dividend stocks right now. Of course, dividend yields change as stock prices change. However, all three are routinely among the highest-yielding stocks in the S&P 500. Does that make them good investments? Let’s see.

Company

Dividend yield

Altria Group (NYSE:MO)

9.02%

Devon Energy (NYSE: DVN)

6.73%

AT&T (NYSE:T)

6.35%

Data source: Google Finance. Dividend yields as of March 27.

1. Altria Group

Altria is America’s largest tobacco company and owns popular brands such as Marlboro, Black & Mild and Copenhagen. The stock has lagged lately, but this year has seen a slight turnaround for its investors, with the stock up more than 5% this year. Still, the company’s total return over the past five years has only been about 16%, which isn’t anything to write home about.

Many investors have reservations about investing in a tobacco company because of its social harm. That’s why Altria traditionally offers an ultra-high dividend yield to attract and retain investors. It routinely tops the S&P 500’s list of highest-paying dividend stocks.

The biggest concern at Altria is the declining smoking rate among American adults. This has a tangible effect on sales volume. Fortunately, the company has been able to use its pricing power to offset declining sales volume.

The company must find a viable alternative to its cigarettes to maintain the long-term attractiveness of its investments, but it has the resources to continue returning shareholder value (through dividends and share buybacks) for the foreseeable future as it does so works out.

2. Devon energy

Devon Energy is an energy company specializing in the exploration, development and production of oil and natural gas. It has a unique dividend structure that you don’t see often. Instead of an annual base amount paid out in quarterly installments, the company has a base dividend amount and a variable amount based on the latest cash flow. The current base dividend is $0.22 and the total is $0.44 per share.

DVN dividend chart

Devon Energy’s current quarterly dividend is slightly less than the average of the past five years, but that is mainly due to high oil prices in 2022, which means the company’s cash flow is much higher than normal.

Dividend aside, Devon Energy has done well to optimize its operations to become more efficient. This year, the company plans to spend about 10% less to maintain current production. Add to that the improved drilling efficiency, and Devon Energy is moving in the right direction.

3. AT&T

After years of well-documented missteps (namely its media and entertainment ambitions), AT&T appears to be returning to its core telecom business.

Despite cutting its dividend in half in 2022, AT&T continues to offer one of the higher yields in the S&P 500. While many investors appreciate this benefit, others have reservations about investing in AT&T due to questions about the stability of the dividend. That makes sense, since the dividend is the main draw of investing in the telecom giant.

However, concerns about AT&T’s dividend have largely subsided as the company’s free cash flow has soared over the past year.

T Free cash flow chart

I think it’s important to focus on AT&T’s free cash flow because it provides a clearer picture of the company’s financial health and its ability to maintain or increase dividends and cover debt obligations. AT&T expects free cash flow to be between $17 billion and $18 billion in 2024, which is more than enough to cover both.

Telecoms is a sector that is becoming increasingly important as the world becomes more digitally connected and dependent on technology, both personally and professionally. Since AT&T is one of the top players in this space, I would feel comfortable keeping it for the long term.

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Stefon Walters has no positions in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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

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