Dividend stocks help you earn money without any effort on your part. And this passive income can be incredibly powerful if reinvested for the long term and compounded over the years. This is also a large part of why high dividend stocks can be particularly attractive, as they offer investors better value for money.
But high returns also tend to come with increased risk. Three of the highest dividend paying stocks among stocks in the S&P500 today are Walgreens Boot Alliance (NASDAQ:WBA), Altria Group (NYSE:MO)And VerizonCommunications (NYSE:VZ). These stocks currently provide plenty of dividend income for investors relative to the S&P 500 average. But their yields are high for a reason (or several) that isn’t necessarily good.
Are these three S&P 500 dividend payers worth adding to your portfolio today? Or is there too much risk associated with their high payouts?
1. Walgreens Boots Alliance: 6.3% dividend yield
Walgreens’ dividend is one of the main reasons investors have held shares of the pharmaceutical retailer over the years. This is also why the stock has been a bad buy lately. Investors became concerned that the payment was unsustainable.
At the start of the year, management confirmed the worst by announcing a dividend cut, reducing the quarterly dividend by 48%. Until then, the stock had enjoyed a streak of annual dividend growth that spanned decades. It was about to become a King of dividends in a few years.
Unfortunately, even with a reduced dividend, investors should not be confident that the reduction will be sustainable. Over the past 12 months, Walgreens suffered an operating loss of more than $2 billion. Going forward, the road ahead will be tough as it continues to invest in a costly plan to open hundreds of primary care clinics in its outlets.
The stock hasn’t been this cheap in decades, and there’s a good reason for that: Walgreens has enormous risks right now, and it’s not a stock. dividend investors should feel comfortable relying on.
2. Altria: dividend yield of 8.4%
Tobacco giant Altria attracts investors with an even higher yield on its dividend distributions. Unlike Walgreens, it continues to increase its dividend every year. Last year, the company increased its quarterly dividend by 4.3%, marking the 58th dividend increase in 54 years. As with Walgreens, the dividend provided an important reason to invest in an income stock that did not contribute much to stock price appreciation.
There are a few warning signs to consider with this dividend payer. The company’s payout ratio is a bit high, at over 80% of profits (although it has been at this level for several years now). Altria’s revenue has also declined over the past two years, and that appears to be the case again this year. In the first quarter, net sales decreased by 2.5% year-on-year.
Altria is trying to shift to new revenue streams to replace declining revenue from cigarette sales and revive its growth. Consumers continue to move away from tobacco products. Recent data suggests that globally, only one in five adults use tobacco today, compared to one in three in 2000.
Although Altria’s dividend appears safe at the moment, it may only be a matter of time before it too has to consider cutting its payout. This is another risky stock that may not be suitable for income investors with a long-term investing mindset.
3. Verizon Communications: 6.5% dividend yield
Telecom giant Verizon hasn’t been increasing its dividend payments for as long as Altria, but it can rightly be called a solid dividend growth stock. Last year, it extended its streak of annual dividend increases to 17 years.
Its payout ratio currently sits around 100%, which can be disconcerting for income investors. But that ratio calculation was affected by a one-time $5.8 billion goodwill writedown in the fourth quarter, which affected earnings. The most important metric to note is that Verizon generated $13.4 billion in free cash flow over the trailing 12 months, which exceeds the $11.1 billion paid in dividends during that period. Free cash flow can be a better indicator of the sustainability of a dividend because it excludes non-cash items such as depreciation, as well as depreciation and amortization.
Although Verizon’s business isn’t taking off at all, the company expects wireless revenue growth of between 2 and 3.5 percent this year.
The stock trades at just 9 times its expected future earnings, making it an attractive value buy. Verizon’s business still appears to be in good shape, and it’s the only stock on this list that I would consider buying for the long term.
Should you invest $1,000 in Walgreens Boots Alliance right now?
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Verizon Communications. The Mad Motley has a disclosure policy.
Is now the time to buy 3 of the highest dividend stocks in the S&P 500? was originally published by The Motley Fool
