“The 6 Best Payouts in the S&P 500.”
That was the title of an article that recently appeared in Barron’s.
The article refers to the six highest-yielding stocks in the S&P 500.
All six offer starting dividend yields above 7%.
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This list is composed of the following six stocks in no particular order:
- Altria (NYSE: MO)
- Verizon Communications (NYSE: VZ)
- AT&T (NYSE: T)
- Truist Financial (NYSE: TFC)
- KeyCorp. (NYSE: KEY)
- Walgreens Boots Alliance (NYSE: WBA)
They are all recognizable names. They are all established company. They all have been publicly traded for decades.
But don’t let these facts embolden you.
“Best” is a subjective word.
What Barron’s calls “best,” I call risky.
All six violate the five variables (rules) I consider when vetting dividend sustainability.
- Revenue Growth
- Earnings Growth
- Operating Cash Flow
- Dividend Payout Ratio
- Debt Level
When we vet the group in total, we find little-to-no revenue and earnings growth, variable operating cash flows, high dividend payout ratios, and high debt levels.
The fundamentals mostly trend in the wrong direction.
Worst yet, their ability to create long-term wealth as a group has been abysmal.
A long-term investment in these stocks has been mostly a dead-money investment, even with dividend reinvestment.
You will notice one glaring exception.
The outlier orange line belongs to Altria Group, the company behind the Marlboro brand.
Altria reports no revenue growth of any significance. Cigarette volume falls annually. Investments in vaping and marijuana have failed to produce meaningful returns.
The company compensates by continually raising cigarette prices.
A sharp eye on costs and efficiency has enabled operating cash flow and earnings to trend trajectory.
That said, Altria’s dividend consumes 80% of earnings annually, so the dividend payout ratio is high.
Interestingly enough, Altria’s dividend yield, at 8.8%, is the highest of the Barron’s group.
And ironically enough, Altria’s dividend is arguably the safest of the six.
Altria also has been the best performer over the past five years.
But don’t get too excited.
Altria was able to keep its head above water only because of a bountiful dividend and steady single-digit earnings growth that was disconnected from the volume trend.
With dividend reinvestment, Altria shares have returned 9%, but that’s over five years. You’re looking at annual returns in the 1%-to-2% range.
Remove the dividend and dividend reinvestment, and you’d be down 21% on Altria’s share price.
It’s been a solid run, but Altria’s glory days are in the rear-view mirror.
But at least Altria is in the black, and it’s the only one of these high-yield dinosaurs in the black.
The remaining five are down 17% (Verizon) to 53% (Walgreens) since 2018, even with dividend reinvestment.
An old Wall Street adage says that more money has been lost chasing yield than at the point of a gun.
Keep that adage in mind when you find yourself seduced by the Siren song of yield. I’m unsure Barron’s did.
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