Pfizer pays more than 7% in dividends as its stock price has been crashing in recent years.
Verizon is a top telecom company that generates minimal growth.
Altria is a Dividend King, but questions loom around its business as tobacco use declines.
Did you know that if you have a reliable income stock that yields 6%, you would only need to invest about $16,700 in it to collect $1,000 in dividends over the course of a full year? The average stock on the S&P 500, meanwhile, yields just 1.2%, and it would take an investment of more than $83,000 to generate that same level of dividend income.
That’s a big part of why high-yielding stocks are so enticing to investors. But high-yielding stocks also sometimes come with significant risks. If a dividend payout isn’t sustainable, then it may end up getting cut or suspended. And if that happens, the stock price can go into a tailspin as well. For investors, it becomes a double whammy: lost dividend income and a loss on the investment.
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Here’s a closer look at three stocks that yield more than 6% right now. Let’s see if Pfizer (NYSE: PFE), Verizon Communications (NYSE: VZ), and Altria Group (NYSE: MO) offer safe payouts you can rely on for the long term.
Image source: Getty Images.
Pharma giant Pfizer yields 7.2%, which seems like an astronomical payout for what’s historically been a safe dividend stock. In June, the company declared a dividend for the third quarter of $0.43 per share (payable in early September). And that payment marked the 347th consecutive quarterly dividend (nearly 87 years) that Pfizer (or one of the companies it merged with over the years) has made in its history.
Investors today are concerned, however, about whether the payout can remain intact given that the company is no longer raking in record numbers from COVID-19 vaccine sales. In the past five years, the stock price has declined by 30%, and that has pushed its yield up in the process. Pfizer’s current payout ratio of 90% is indeed high, but its free cash flow has totaled $12.4 billion over the trailing 12 months, which is comfortably higher than the $9.6 billion it paid out in dividends over that stretch. There are challenges for Pfizer, but the company has been expanding its business via acquisitions, with the most notable move being its $43 billion acquisition of oncology company Seagen back in 2023.
While its future contains question marks, Pfizer’s pursuit of growth and solid free cash flow makes me inclined to believe that the healthcare stock will be fine, and its dividend will remain intact as well. Pfizer could be one of the most underrated income stocks to own right now.
Another high-yielding stock that can’t seem to win over investors these days is Verizon. It yields 6.3% and has the potential to provide investors with plenty of recurring income. In September, the company also announced that it would be increasing its dividend for a 19th consecutive year.
Verizon’s payout ratio is modest at 63% of earnings, and its free cash flow has been rising. This year, its guidance calls for between $19.5 billion and $20.5 billion in free cash flow, which is well above the $11.4 billion it pays in cash dividends over the course of a full year.
Verizon’s modest single-digit revenue growth may not be all that inspiring, but the business itself remains fairly stable. And for investors who just want a safe and stable income stock to own, Verizon checks off a lot of key boxes. This year, with interest rates coming down, the stock has risen by 8% as investors may be more inclined to load up on high-yielding investments. And with Verizon’s stock trading at a price-to-earnings multiple of just 10, it’s still a fairly cheap investment to load up on today.
Tobacco giant Altria rounds out this list with its 6.5% dividend yield. The stock’s payout ratio is around 79%, which suggests the dividend is sustainable. And Altria’s free cash flow over the past four quarters has totaled $8.7 billion, which is higher than its annual dividend payments of $6.9 billion.
When it comes to Altria, however, the big questions are about its core business and whether it can be a safe investment to hang on to in the long run, particularly as tobacco use is on the decline. While it has attempted to diversify into oral and smoke-free products, the bulk of its business still centers around smokeable products, which generate the lion’s share of its revenue at 88%.
While Altria doesn’t have the highest yield on this list, this is the only dividend that I don’t have confidence in over the long term. In the short run, the dividend still looks safe, but as the company’s financials potentially worsen due to declining demand for its core tobacco products, it may only be a matter of time before this Dividend King has to eventually reduce its payout.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
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