It's a mistake to buy a stock based on one aspect of a company, but investors often get hung up on that. For example, income-oriented investors often give dividend yields too much weight in their investment decisions. That could be a mistake. Let's take a look at the three companies with the highest yields. S&P500 Index as a starting point. Artoria (NYSE:MO), AT&T (New York Stock Exchange: T)and Health peak properties (NYSE:DOC) has a huge yield, but they all come with their warts and look like they could be a terrible long-term investment. Here's what you need to know before you buy.
Altria: Avoiding Dying Companies
Altria's dividend yield is extremely high at 9.3%. The company has regularly increased its dividend over the years. The company comes from the consumer staples sector, which is generally considered a conservative sector of the market. Additionally, our ownership of the iconic Marlboro brand gives us a dominant position in the market. Actually, this last fact is the problem.
Altria is a tobacco company that sells cigarettes in the United States, where smoking is increasingly frowned upon. Looking at this in numbers, the company's cigarette production will be 76.3 billion cigarettes in 2023, down from 101.8 billion in 2019. This is a 25% decrease in just five years. The company has been able to offset the impact of lower sales volumes by steadily increasing prices. But at some point, rising prices could make the decline even worse. Most investors would do well to avoid businesses that appear to be in long-term decline.
AT&T has a dominant position but is heavily in debt.
AT&T has a very high dividend yield of 6.7%. It has continued to increase its dividend every year for many years. The company is one of the few large and influential mobile communications providers in the United States. Its coverage network is large and it will be difficult and expensive for startups to replace it. In other words, AT&T is firmly established in the business of attracting many loyal customers who are happy and reliably paying their monthly cell phone bills. AT&T generates significant cash flow to support its dividend.
The problem with AT&T's business is that it is capital intensive. Not only were they expensive to build, they also needed to be maintained and upgraded to keep up with advances in cell phone technology. Because of this, AT&T's balance sheet is heavily leveraged. Leverage is not uncommon in the mobile phone industry, but its debt-to-equity ratio of 1.3x is not the lowest among its peer group and has increased by 40% over the past five years. Investors need to understand that while the dividend is probably safe, they need to keep a close eye on AT&T's balance sheet.
Healthpeak Properties is Designed to Profit
Healthpeak Properties is a real estate investment trust (REIT), so it's a little different than the other two stocks featured here. This is a business structure specifically designed to return the proceeds from institutional-level rental properties to investors in a tax-efficient manner. A high dividend yield of 6.6% is not that unusual in the REIT industry. However, it's still important to understand exactly what Healthpeak Properties does.
As the name suggests, this REIT owns medical real estate, specifically clinics and medical research facilities. Over time, this should be an attractive focus given the increasing size of the elderly population. However, it is common to use debt to purchase real estate, and interest rates have been on the rise recently. This has led to higher operating costs and investors are concerned about short-term performance. Financial results for the fourth quarter of 2023 were essentially flat year over year. So, while there are reasons to be concerned, over time, it seems very likely that Healthpeak's business focus will allow it to continue paying reliable and large dividends.
One thing to avoid, two things to learn from.
At the end of the day, most investors will want to avoid Altria's high-yield, slowly declining business. AT&T and Healthpeak are much better companies to spend your valuable time researching. That being said, both of these high-yield stocks will face problems in the short term, but in the long term they will probably continue to pay dividends to investors because both companies have strong businesses. I'm sure you'll be able to hold out.
Should you invest $1,000 in Altria Group right now?
Before buying Altria Group stock, consider the following:
of Motley Fool Stock Advisor Our analyst team has identified what they believe Best 10 stocks What investors can buy right now…and Altria Group was not among them. These 10 stocks have the potential to generate impressive returns over the next few years.
when to think about it Nvidia This list was created on April 15, 2005…if you invested $1,000 at the time of recommendation. you have $537,557!*
stock advisor provides investors with an easy-to-understand blueprint for success, including guidance on portfolio construction, regular updates from analysts, and two new stocks each month.of stock advisor For the service more than 4 times The resurgence of the S&P 500 since 2002*.
See 10 stocks »
*Stock Advisor will return as of April 22, 2024
Reuben Greg Brewer has no position in any stocks mentioned. The Motley Fool recommends Healthpeak Properties. The Motley Fool has a disclosure policy.
Should you buy the 3 highest dividend stocks in the S&P 500? Originally published by The Motley Fool
