Ownership power Stocks that pay dividends Often underestimated. For example, consider that a study by The Hartford Fund and Ned Davis Research found that between 1973 and 2023, companies that increased or initiated dividend payments delivered an annualized return of 10.2%, compared to non-dividend payers. Only 4.3% (and equal-weight S&P 500 fund average 7.7%).
Healthy and growing dividend payers have stock prices that grow over time, while paying dividends that grow over time. Given that stock profile, you might think it’s smart to get the fattest dividend yields you can find — perhaps focusing on the biggest dividend yields in the S&P 500.
Are you missing the morning scoop?Breakfast News It delivers all this in one quick, foolproof, and free daily newsletter. Sign up for free »
Here’s a look at why you might want to think twice before taking this approach.
Image source: Getty Images
It is important to understand what a dividend yield is. It is a ratio, usually expressed as a percentage, where a stock’s total annual dividend amount is divided by its current stock price. So imagine the hypothetical Buzzy’s Broccoli Beer (ticker: BRRRP ), recently trading at $50 per share and paying $0.50 per quarter — that’s $2 annually. Divide that $2 by $50 and you arrive at 0.04, or a dividend yield of 4%.
Companies typically pay quarterly dividends, and their dividend amounts usually remain the same for one or more years. Company share prices, however, fluctuate frequently. So the dividend yield changes often, too, at least a little. Remember that the ratio is the dividend divided by the stock price. So if the stock price rises sharply, the yield will fall – and vice versa.
Thus, a particularly fat dividend yield may be the result of a stock falling, and not simply indicative of a highly leveraged business. So, it’s always smart to take an extra close look at a fat yield to see if the company is facing trouble.
Below are three companies that were the highest yielding stocks in the S&P 500 recently. Let’s take a closer look at each one.
Walgreen Boots Alliance(NASDAQ: WBA ) Was recently sporting a huge dividend yield of 12.1%. It certainly looks attractive. Invest $10,000 at Walgreens and collect $1,210 a year! But hold on – a closer look at the company will reveal that it has been struggling lately. The stock was About 65% down Year-to-date as of this writing, and down 21% over the past month.
what is happening Well, the company has been unprofitable in recent years, and is closing some 1,200 stores in an effort to get back on track. Part of the problem is that Walgreens is facing increasing competition from the likes Amazon.comGoodRX, Costco WholesaleAnd also Walmart.
It’s always good to check a dividend payer’s “payout ratio” — the portion of earnings it’s paying out in dividends. Walgreens’ was recently 290%, which suggests it’s paying out far more than it actually could or should, and suggests the dividend may be cut. So this is not an attractive dividend stock for me.
If you’re interested in this, maybe keep an eye on the company’s development for a while, looking for signs of a successful turnaround.
Altria(NYSE: MO) also faces some challenges, as fewer Americans are smoking today. The US smoking rate hit an 80-year low earlier this year, per Gallup. Altria sees the writing on the wall and is investing in alternatives to cigarettes, such as vaping products. However, cigarettes remain its main offering for now.
Altria’s stock is growing, though not at a great pace, and its dividend — most recently yielding 7.3% — does Attractive appearance. A recent payout ratio of 67% suggests it’s sustainable (at least in the short term), with room for growth, and Altria has consistently raised its payout for more than 50 years.
So consider investing in Altria, but don’t buy it and forget about it. You will need to follow its progress to ensure that its performance, which has not been stellar recently, does not weaken further. Some expect the company to do better in the future, if less traditional tobacco products gain traction.
Then there is Pfizer(NYSE: PFE )Recently yielded 6.7%. It, too, is facing some obstacles, such as reduced demand for its Covid-19 vaccines and related treatments. But like other pharmaceutical companies, it also has many more irons in the fire, in the form of drugs in development in its rich pipeline. Its expansion into cancer treatments is particularly promising.
Some worry that Pfizer has taken on too much debt to buy other companies (and their drugs), and others worry that the incoming administration in Washington DC could reduce interest in vaccines. But there is more to medicine than vaccines. One of the more promising drugs in development at Pfizer is to tackle weight loss. Current weight loss drugs are selling fast, and many products could become big sellers in that niche.
So go ahead and check out these or other fat-dividend stocks. Just be careful whenever a payment is particularly high. And remember that small yields can be fine – especially if they’re growing at a fast pace.
Have you ever felt like you missed the boat on buying the most successful stocks? Then you’ll want to hear this.
On rare occasions, our expert team of analysts a “Double down” stock Recommend companies they think are going to pop. If you’re worried that you’ve already missed out on an investment opportunity, now is the best time to buy before it’s too late. And the numbers speak for themselves:
Nvidia:If you invested $1,000 when we doubled in 2009,You will have $352,678!*
Apple: If you invested $1,000 when we doubled in 2008, You will have $44,102!*
Netflix: If you invested $1,000 when we doubled in 2004, You will have $466,805!*
Right now, we’re issuing “double down” alerts for three great companies, and there may not be another opportunity like this anytime soon.
John Mackey, former CEO of Whole Foods Market, is a member of the board of directors of The Motley Fool, an Amazon subsidiary. Selena Marangian Holds positions at Altria Group, Amazon, Costco Wholesale, and Pfizer. The Motley Fool features and recommends Amazon, Costco Wholesale, Pfizer, and Walmart. Motley Fool has a Disclosure Policy.
