Contemplating the Purchase of the Top Three Dividend-Yielding Stocks within the S&P 500?
"Investing Breeds" is a popular strategy that involves purchasing shares of the highest-yielding stocks from a larger market index, such as the S&P 500 (^-GSPC** -0.43%). By doing so, you can buy into top-tier companies whose shares are selling at a discount. Over time, these struggling companies should recuperate from their difficulties, transforming low-priced stocks with high dividends into reliable income generators with healthy share prices.
If you wanted to apply this strategy to a broader pool of potential dividend champions, the S&P 500 might be a suitable choice. The S&P 500 index is much larger than the Dow Jones Industrial Average and includes handpicked top American companies. Moreover, the S&P 500 list includes more generous high-yield dividend payers than its Dow Jones counterparts.
So, let us examine the top three dividend yields on the S&P 500. Are Walgreens Boots Alliance (WBA 0.76%), Altria (MO 0.40%), and Ford (F 0.20%) likely to bounce back from their current difficulties in the long run? Furthermore, which of these high-yielding S&P 500 stocks seem like excellent buys during mid-December 2024?
Walgreens Yield: 12.2%
The convenience and pharmacy retailer outshines its competitors in several aspects:
- Its dividend yield of 12.2% is in a league of its own, as no other competitor manages to break the 10% or 8% barrier.
- Walgreens' stock price has plunged by 62% in 2024, making it the clear winner in this unenviable category.
- The company is unprofitable on the bottom line, and it has negative free cash flows for the past year.
- Disillusioned investors have sold 16% of Walgreens' shares short at the conclusion of November, up from 5% in March. Once again, Walgreens leads the way in this unfortunate metric.
The international retailer boasts strong revenue growth over the past few years, but its turnaround strategy has yet to produce substantial profits. The company is reportedly in talks with private equity firm Sycamore about a leveraged buyout, but even this desperate escape plan seems unlikely, as dealing banks will require a viable long-term business plan. With online pharmacies gaining traction, Walgreens is left with an expensive, unprofitable brick-and-mortar network backed by a heavy $9.5 billion debt load.
Although this attractive dividend yield may seem tantalizing, it is not connected to a foreseeable turnaround effort. In fact, extreme yields often serve as warning signs - Walgreens faces significant business challenges and it is best to avoid the stock.
Altria Yield: 7.5%
As previously mentioned, tobacco company Altria has fewer financial problems than Walgreens. The stock has soared by 33% since the beginning of the year, its dividend yield is in line with industry standards, and the company can finance its entire dividend budget using robust free cash flows. Few investors expect disappointing returns, and less than 2% of its shares are being shorted.
Moreover, Altria's leadership is adapting to the new tobacco market. The company aims to take a leading position in smokeless and tobacco-free alternatives.
Although Altria is not everyone's cup of tea, there is a sizable market for these products, and the stock should be able to maintain its attractive dividend policy for years to come. If you are interested in these "sin stocks," you should weigh Altria's business against related companies like Philip Morris (PM 0.28%) and British American Tobacco (BTI 0.72%) before investing. A thorough financial review is essential before making a purchase decision.
Ford Yield: 7%
Automaker Ford offers a compromise between Walgreens and Altria in various aspects:
This stock has underperformed the broader market, with a 17% price decrease in 2024. The short-seller crowd is comparable to Altria's, and Ford's dividend yield is justified when considering its historical value.
Ford has shifted its focus from cars to trucks, achieving favorable shareholder results. Sales are increasing, and only half of Ford's free cash flows are required to finance the full dividend. Investors may be concerned about lower profit margins, but this could simply be a clever tax-avoidance strategy.
Altria is grappling with updated smoking habits, while Walgreens faces the rise of online sales. Similarly, Ford must adapt to the shift from gasoline vehicles to electric alternatives.
The company has announced layoffs and production pauses in Europe and is developing a wide variety of electric vehicles. Although this strategy is moving in the right direction, it remains to be seen how Ford will stack up against innovating competitors like Japan and Germany.
If I had to choose one of these "Dogs of the S&P 500" stocks now, I would select Ford. This company is making the necessary adjustments to remain competitive in a rapidly changing market, and its dividend yield seems more beneficial than risky.
In light of the analysis, investors looking to invest in high-yield dividend stocks from the S&P 500 might want to consider companies like Altria or Ford. Unlike Walgreens, both Altria and Ford show promising signs of resilience, with Altria boasting a soaring stock price and robust free cash flows, and Ford making strategic shifts towards trucks and electric vehicles.
Consequently, Altria's strong market position in smokeless and tobacco-free alternatives, and Ford's successful transition to electric vehicles, could potentially yield attractive returns for investors in the long run.
