It is understandable that dividend investors often start their search for investment candidates by looking at dividend yields. But simply picking the highest yielding stocks cannot be a winning strategy over the long term. You have to dig more.
A look at the three highest-yielding stocks S&P 500 index, Walgreens Boots Alliance (NASDAQ: WBA), Altria Group (NYSE: MO)and Verizon Communications (NYSE: VZ)help explain why.
Walgreens is struggling
If there’s one thing dividend investors don’t want to see, it’s dividend cuts. But that’s what Walgreens did in early 2024, with its quarterly dividend going from $0.48 per share to $0.25. That’s almost a 50% reduction in payouts, which companies won’t do without good reason.
In the case of Walgreens, the reason is that the company is struggling. Efforts to expand the management of drug benefits are not complete. Then he switched gears and started running an emergency medical clinic, which didn’t go as planned. The CEO who managed the clinic’s efforts has stepped down and the retailer is now working to get operations under a new CEO. Then there’s the dividend cut to add to the company’s negative press.
All in all, Walgreens’ returned 9.7% dividend yield is an indication that investors believe the company is a high-risk investment. At the very least, this is a high-risk turnaround stock that only the most aggressive investors should own. Most would be better off avoiding Walgreens stock today.
Altria has many missteps to make up for
Altria is one of the largest cigarette manufacturers in the United States, with control of the largest brand in the market (Marlboro). But there is a small problem. The volume of cigarettes gradually decreased. For example, in the second quarter of 2024, the volume of cigarettes will decrease by 13% annually! The company ignored the problem and offset the decline in volume with price increases. But it can only be done so many times before consumers will start to back off.
It has also tried to invest in new product categories to find replacements for its declining core operations. The process was uneventful, with failed investments in marijuana and vaping (Juul). It also ended up creating a competitor in the non-smoking space when spun off Philip Morris International (NYSE: PM) have a foreign tobacco business. Philip Morris International is now entering the US market with its own fireproof offering. This is against the backdrop of Altria’s dividend yield of 7.8% or more.
In fairness, the price increase allows Altria to continue to increase its dividend every year. And the company has added NJOY (vape) to its roster, a move that’s better than the Juul investment. But this is still a consumer staples company with a deeply problematic core business, which is probably not the best risk/reward option for most investors.
Verizon is a great company in a competitive business
Of the three stocks here, Verizon may have the most appeal. It has a great yield of 6.4% supported by a growing dividend and good business. Indeed, it is one of the small number of incumbent telecommunications providers in the United States. It will be difficult, if not impossible, to replace the cell phone infrastructure that Verizon has in place. And customers tend to be quite loyal, leading to an annuity-like revenue stream.
The problem is that keeping up with Verizon’s peers is an ongoing battle that requires heavy capital investment. Loss is not a good option, so competition is quite fierce and cost is always a good material as technology continues to evolve. That’s where the big risk comes in, because Verizon’s influence is higher than that of its closest peers. That adds to the risk, even if Verizon still remains a better company than Altria or Walgreens. For very conservative dividend investors Verizon is probably a pass, but for most likely it will be worth a deep dive.
Look through the dividend yield
There’s nothing wrong with dividend investors using dividend yields as the first cut to finding stocks to watch. But a quick overview of Walgreens, Altria, and Verizon highlights the importance of looking deeper than dividend yield. If you do that, you’ll find that high returns often come with high risks. The question is whether the risk is worth taking. More often than not, the answer is no.
Should you invest $1,000 in Altria Group right now?
Before you buy shares in Altria Group, consider this:
At Motley Fool Stock Advisor The analyst team only recognized what they believed it to be 10 best stocks to buy investors now… and Altria Group is not one of them. 10 stocks that made the cut could produce monster returns in the coming years.
Try when Nvidia created this list on April 15, 2005… if you invest $1,000 when you recommend, you will have $720,542!*
Stock Advisor gives investors an easy-to-follow blueprint for success, including portfolio-building guidance, regular updates from analysts, and two new stock picks every month. At Stock Advisor service already more than four return of the S&P 500 since 2002*.
View 10 stocks »
* The Stock Advisor returns on August 26, 2024
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Philip Morris International and Verizon Communications. The Motley Fool has a disclosure policy.
Should You Buy the 3 Highest Dividend Stocks in the S&P 500? this was originally published by The Motley Fool
