The logic seems sound enough. The whole point of investing is making money. Dividends are money. Therefore, buying high-yield dividend stocks is a great way to achieve your investing goal.
That simplistic line of thinking, however, ignores several more important realities that come with stock picking. The big takeaway is that big dividend yields alone don’t tell the whole story. Other questions need to be asked (and answered), like: Can those big dividend payments be sustained? Is the stock in question set to lose more value than its dividend payments are worth? Will that particular pick even be able to outpace inflation in the long run?
Before you go hunting for high yields, even among the market’s biggest names, here’s what you need to consider.
A closer look at the S&P 500’s highest-paying dividend stocks
There’s no point in beating around the bush — the S&P 500‘s (^GSPC 0.57%) highest-paying dividend stocks right now are Altria Group (MO 0.05%), Kinder Morgan (KMI -0.12%), and Verizon Communications (VZ -0.48%), sporting yields of 9.7%, 6.8%, and 6.6% (respectively). Honorable mentions go out to Devon Energy (DVN -1.93%) and 3M (MMM -0.32%), both of which aren’t too far behind Verizon in terms of yield. In fact, it’s possible that, by the time you’re reading this, some of those positions will be changed.
The overarching question remains, though: Are any or all of these tickers worth stepping into due to their superior dividend yields?
In a word, no.
Don’t misunderstand. Some of these names might be right for you. Take tobacco giant Altria as an example. Although the cigarette business doesn’t have much of a long-term future, it’s got plenty of years — maybe even decades — of cash flow to generate before smoking-cessation efforts make the tobacco business untenable. You’re collecting almost 10% per year on your investment in the meantime. Not bad.
If you’re looking for long-term capital appreciation in addition to income, however, Altria isn’t in a great position to offer it. The world understands the tobacco business has little to no growth left to offer. The stock is apt to increasingly reflect this reality as time marches on. What a dividend in the interim, though!
Verizon’s slightly more attractive in this regard, but only slightly.
Yes, now that people are addicted to mobile phones, they will never go without them. That’s why Verizon will forever have a revenue-bearing market to serve. The company is also building a wireless connectivity business meant to serve enterprise-level customers in need of private 5G networks. Straits Research suggests this young industry is set to expand at an annualized pace of nearly 44% through 2031. Wow! That’s a serious tailwind for Verizon to plug into.
However, private networking is still only a small piece of Verizon’s revenue mix. Great growth in this market won’t actually meaningfully move the needle for Verizon’s total revenue. The wireless market is also highly saturated, though, forcing margin-crimping price wars. In the meantime, the $138 billion worth of long-term debt on the company’s books is getting a whole lot more expensive now that interest rates are well up and off of the rock-bottom lows still seen just a couple of years back. Making bigger interest payments further eats into profits.
Verizon is hardly doomed, to be clear. Connect the dots, though. The company’s margins could be thin for the foreseeable future, with subpar dividend growth in the cards as a result.
As for oil and gas middleman Kinder Morgan, there’s a little more hope for income-minded investors.
If you’re not familiar, Kinder Morgan helps the energy industry get oil and gas to where it needs to be. The company owns or has a stake in 82,000 miles of pipelines, 139 oil and gas terminals, and 702 billion cubic feet of natural gas storage capacity. It’s also a gas producer, although the bulk of its business is logistics and transportation. This is a business built to support dividend payments, too, since it charges the same delivery fee regardless of the price of the oil and gas being transported through its pipes. Just think of it as a tollbooth.
It seems like a two-edged sword — on the surface. Obviously, the world is still reliant on oil and gas, but renewables are the future. There will come a point in time when we no longer need hydrocarbons.
That time is much, much further down the road than many people might believe, however. Although the International Energy Administration expects oil consumption’s growth to slow dramatically between now and 2028 before practically peaking by 2030, the agency also expects the world to still be using about as much oil and gas in 2050 as it’s using now.
This, of course, bodes well for Kinder Morgan.
Dividend stocks are more than their dividend yield
There’s a bigger point to be made than the deeper dives into each of these companies’ true risks and rewards, of course. That is, stock-picking is more than simply plowing into a new position based solely on one number (in this case, the current dividend yield). The number doesn’t tell you much of anything about the company’s current health or its forward-looking prospects.
Indeed, the number isn’t even guaranteed to persist.
Take the aforementioned 3M as an example. Although the company has been able to not only pay a quarterly dividend for decades now but raise its payout for 64 consecutive years, soaring legal costs linked to a massive class action lawsuit have some observers wondering if a dividend cut is inevitable if 3M wants to successfully navigate the foreseeable future.
With all of that being said, if you’re still looking for a high-yielding S&P 500 constituent to plug into here, Kinder Morgan is your best bet. The nature of its tollbooth-like business makes the dividend’s underlying cash flow sustainable. And the need for oil and gas isn’t going to fade anytime soon. There’s also plenty of opportunity for Kinder Morgan to expand its operation in the future, in turn expanding the dividend.
Bottom line? Even with dividend stocks, you’re buying unique companies in unique situations. You should always take a step back and examine the bigger picture, no matter how big the dividend yield is.