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Should You Buy the 3 Highest-Paying Dividend Stocks in the S&P 500?

In Business
May 12, 2024

The S&P 500 fell 4.2% in value last month. According to S&P Global, “Geopolitics, rising government bond yields, inflation and monetary policy concerns are behind the recent drops, yet stocks may still have room to rise again.”

After the drop, three iconic dividend stocks now pay huge yields between 6.5% and 9%. If you’re looking for big dividends, this is your chance.

This 9% dividend has always been reliable

Altria Group (NYSE: MO) has long been a high-paying dividend stock. Over the last five years, the dividend yield has always remained above 6%. Due to some recent share price weakness, the dividend yield is now around 9%. This is a great opportunity to buy into a recession-resistant business with high levels of free cash flow.

At its core, Altria is a tobacco business. It owns a portfolio of recognizable brands including Marlboro, Copenhagen, Skoal, Red Seal, Benson & Hedges, Chesterfield, NJOY, and Black & Mild. This is a market that varies little year to year, even during recessions. The mix of products may shift — combustibles, for example, have slowly ceded share to vaporized nicotine — but overall nicotine use has remained stable. Altria’s reputation, market access, and capital advantages have allowed it to compete wherever its core market heads.

Just because the nicotine market is stable doesn’t mean it’s growing. From 2018 to 2023, for instance, nicotine usage rose by just 1%. That’s the reason Altria pays such a large dividend. This stock will never make you rich overnight, but it’s proven a reliable way to generate consistent dividend income over the long term. That equation won’t change much in the years to come.

MO Chart

These 2 stocks have become dividend all-stars

The telecom industry has long paid above-average dividends. These businesses can be expensive to establish at first, but once up and running, they typically generate high levels of free cash flow. AT&T (NYSE: T) and Verizon (NYSE: VZ), for example, now pay dividends of 6.5% and 6.7% respectively. Before you jump in, however, there are a few things you should know.

VZ Chart

As you can see in the charts above, both AT&T and Verizon have consistently paid high dividends, although Verizon’s yield in particular has picked up strongly in recent years. The impetus behind these high yields, however, wasn’t a dramatically higher payout. What’s changed is that the share prices for both companies has gradually fallen, artificially inflating the dividend yield.

You can see this dynamic in action by looking at each companies total return over the past decade. These returns factor in both share price movement and dividends. Since 2014, Verizon and AT&T have both posted total returns of around 35%. The S&P 500, for comparison, rose in value by 234%.

AT&T and Verizon both face their own difficulties, but the root challenge has been competition, which has eroded pricing power and increased operational costs. AT&T actually had to cut its dividend in 2022 after the spinoff of its media division, WarnerMedia. Verizon has been able to gradually raise its payout, but not by much. Last quarter, the company implemented a 2% boost to the payout.

Should you buy Altria, Verizon, or AT&T stock?

If you’re looking for a reliable, high-yield dividend stock, Altria Group is the better pick versus AT&T or Verizon. It’s not that the latter two are poor businesses, but rising telecom competition won’t abate anytime soon. And while Altria has faced competition of its own, its established supremacy in the combustibles market buys it time to innovate and control new market categories as they emerge.

Should you invest $1,000 in Altria Group right now?

Before you buy stock in Altria Group, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Altria Group wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool recommends Verizon Communications. 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

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