The power of owning dividend-paying stocks is often underestimated. Consider, for example, that a study by Hartford Funds and Ned Davis Research found that between 1973 and 2023, companies that grew or initiated dividend payments earned annualized returns of 10.2%, while those that did not pay dividends earned only the 4.3% (and an equal rate). weight S&P 500 fund averaged 7.7%).
Healthy, growing dividend payers will tend to have stock prices that increase over time, while paying dividends that also increase over time. Given that stock profile, you might think it’s smart to get the highest dividend yields you can find, perhaps focusing on the S&P 500’s highest dividend yields.
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Here’s why you might want to think twice before taking this approach.
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It is important to understand what dividend yield is. It is a ratio, usually expressed as a percentage, where the total amount of a stock’s annual dividend is divided by the current price of the stock. So let’s imagine Buzzy’s hypothetical Broccoli Beer (ticker: BRRRP), which recently trades at $50 per share and pays $0.50 per quarter, which is equivalent to $2 per year. Divide that $2 by $50 and you get 0.04, or a 4% dividend yield.
Companies typically pay dividends quarterly, and their dividend amounts generally remain the same for one or more years. However, company stock prices change frequently. Therefore, dividend yields also change frequently, 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.
So an especially high dividend yield may be the result of a stock having tanked, and not simply reflect a super generous business. Therefore, it is always smart to take a closer look at grease performance to see if the company is facing any problems.
Below are three companies that were recently the top-performing stocks in the S&P 500. Let’s take a closer look at each.
Walgreens Boot Alliance(NASDAQ: AMB) It recently showed a huge dividend yield of 12.1%. This certainly looks attractive. Invest, say, $10,000 at Walgreens and raise $1,210 over the year! But wait: a closer look at the company will reveal that it has been struggling recently. The stock was down nearly 65% year-to-date at the time of writing, and 21% in the last month alone.
What is happening? Well, the company hasn’t been profitable in recent years and is closing about 1,200 stores in an effort to get back on track. Part of the problem is that Walgreens has faced increasing competition from companies like Amazon.comGood RX, Wholesale Costcoand even Walmart.
It’s always good to check a dividend payer’s “payout ratio” – the portion of earnings it pays out in dividends. Walgreens was recently down 290%, suggesting it’s paying far more than it really can or should, and suggesting a dividend cut may be in the offing. So this is not an attractive dividend stock for me.
If you’re interested, maybe just keep an eye on company developments for a while, looking for signs of a successful turnaround.
Altria(NYSE: MO) It also faces some challenges, as fewer Americans smoke. The smoking rate in the United States hit its lowest level in 80 years earlier this year, according to Gallup. Altria has seen the writing on the wall and has been investing in alternatives to cigarettes, such as vaping products. Still, cigarettes remain their main offering for now.
Altria’s stock has been growing, although not at a breakneck pace, and its dividend (which recently yielded 7.3%) does look attractive. The recent 67% payout ratio suggests it’s sustainable (at least in the short term), with room to grow, and Altria has been growing its payout for more than 50 years in a row.
So consider investing in Altria, but don’t buy it and forget about it. You’ll need to track his progress to make sure his performance, which hasn’t been stellar lately, doesn’t decline further. Some expect the company to do better in the future if less traditional tobacco products gain ground.
Then there is Pfizer(NYSE: PFE)with a recent return of 6.7%. It has also faced some obstacles, such as a drop in demand for its COVID-19 vaccines and related treatments. But like other pharmaceutical companies, it has plenty of other issues at play, in the form of drugs in development in its rich pipeline. Its expansion into cancer treatments is especially promising.
Some are concerned that Pfizer has taken on too much debt by purchasing other companies (and their drugs), and others are concerned that the incoming administration in Washington, DC, could reduce interest in vaccines. But medicine is more than vaccines. Among other promising drugs Pfizer has in development is one that addresses weight loss. Current weight loss medications are selling quickly and several products may become big sellers in that niche.
So go ahead and take a look at these or other big dividend stocks. Just be careful when a payment is especially large. And remember that smaller returns can be okay, especially if they are increased at a rapid rate.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Selena Maranjian has positions in Altria Group, Amazon, Costco Wholesale and Pfizer. The Motley Fool ranks and recommends Amazon, Costco Wholesale, Pfizer, and Walmart. The Motley Fool has a disclosure policy.
Should You Buy the 3 Highest Paying Dividend Stocks in the S&P 500? was originally published by The Motley Fool
