It’s understandable that dividend investors often start their investment selection process with dividend yields, but simply picking stocks with the highest dividend yields is unlikely to be a winning strategy in the long term. More research is needed.
Here are the three stocks with the highest yields S&P 500 index, Walgreens Boots Alliance (Nasdaq: WBA), Altria Group (NYSE: MO)and Verizon Communications (NYSE: VZ)helps explain why.
Walgreens is struggling
If there’s one thing dividend investors don’t want to see, it’s a dividend cut, but Walgreens did exactly that at the beginning of 2024, lowering its quarterly dividend from $0.48 to $0.25 per share — a nearly 50% cut in the dividend, something companies don’t do unless they have a very good reason to do so.
In Walgreens’ case, the reason is that the company is struggling. An effort to expand into pharmacy benefit management didn’t go well. Then the company pivoted and started opening urgent care clinics, but those didn’t go as planned. The CEO who led the clinic effort resigned, Retailers The company is currently undergoing a streamlining effort under a new CEO, and a dividend cut has only added to the negative publicity surrounding the company.
Overall, Walgreens’ high dividend yield of 9.7% suggests that investors view the company as a high-risk investment. At the very least, it is high risk. Turnaround StockThis is one that only the most aggressive investors should own. Most people would be better off avoiding Walgreens stock today.
Artoria has a lot of mistakes to make up for.
Altria is one of the largest cigarette manufacturers in the United States and owns the largest brand on the market (Marlboro). But there’s a small problem: cigarette volume has been on a long-term downward trend. For example, cigarette volume in the second quarter of 2024 was down 13% year-over-year. The company isn’t ignoring this problem, and is offsetting the volume decline with price increases. But it can only raise prices so many times before consumers start to balk.
It has also tried to invest in new product categories to find replacements for its declining core business — a process that has not worked out, with investments in marijuana and e-cigarettes (Juul) failing, and spin-offs that have created competitors in non-tobacco areas. Philip Morris International (NYSE: PM) Philip Morris International is now entering the U.S. market with its non-combustible tobacco products, which is why Altria’s dividend yield is so high: 7.8%.
To be fair, rising prices have allowed Altria to continue to grow its dividend every year — it has NJOY (an e-cigarette) under its belt, which has fared much better than its investment in Juul — but it remains a consumer staples company with a deeply troubled core business, and it’s probably not the best risk/reward option for most investors.
Verizon is a good player in a competitive business.
Of the three stocks featured here, Verizon is probably the most widely supported. Its high 6.4% dividend is backed by a growing dividend and a strong business foundation. In fact, it is one of the few incumbent telecommunications providers in the U.S.; the cellular infrastructure that Verizon has in place would be difficult, if not impossible, to replace. And its customers tend to be relatively loyal, leading to a pension-like income stream.
The problem is that catching up with Verizon’s peers is a constant battle that requires significant capital investment. It’s not worth getting left behind, so the competition is pretty intense, and the costs are always pretty big, given that technology is constantly improving. The big risk here is that Verizon’s leverage is higher than any of its closest peers. That increases the risk, but Verizon is still a better positioned company than Altria and Walgreens. For investors who are very conservative with dividends, Verizon is probably a pass, but for most investors, it’s worth digging deeper.
Thinking beyond dividend yields
There’s nothing wrong with dividend investors using dividend yield as their first criterion for finding stocks to watch. But a quick rundown of Walgreens, Altria, and Verizon highlights how important it is to look deeper than dividend yields. When you do, you’ll find that high yields often come with high risks. The question is, are those risks worth taking? Often, the answer is no.
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Reuben Greg Brewer The Motley Fool has no position in any of the stocks mentioned. The Motley Fool recommends Philip Morris International and Verizon Communications. The Motley Fool recommends: Disclosure Policy.
Should you buy the three highest dividend yielding stocks in the S&P 500? Originally published on The Motley Fool
