The stock market offers virtually no certainties. The only two things that investors have come to rely on is that the broad-based indexes will increase in value over time as operating earnings expand and that dividend-paying stocks will run circles around their non-dividend-paying peers.
Although you probably wouldn't believe this last point, considering the year-to-date gains we've seen in high-growth cloud, cybersecurity, and precision-medicine stocks, the data is pretty clear that dividend stocks outperform.
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In 2013, Bank of America/Merrill Lynch released an analysis that examined the performance of dividend versus non-dividend stocks over a 40-year period (1972-2012). The report showed that publicly traded companies initiating and growing their payouts over this four-decade span delivered an average annual return of 9.5%. Comparatively, non-dividend-paying stocks produced a meager compound annual gain of 1.6% over this same period.
The issue is that investors often want the highest yield possible with the least risk imaginable -- yet yield and risk often rise hand in hand. Remember, since yield is simply a function of payout relative to share price, a struggling business with a plunging share price can offer a delectable dividend yield but be masking serious underlying problems. We call this a value trap, and it tends to catch many novice and/or young investors off guard.
But what might surprise you is that Robinhood investors have taken quite a liking to three high-yield dividend stocks (i.e., a yield of 4% or higher). Robinhood is best-known for attracting millennial and novice investors who fancy penny stocks, growth stocks, and anything that's the flavor of the week on Wall Street. However, the following three time-tested businesses are all among the 50 most-held stocks on the platform, as of mid-August.
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AT&T
The most widely held high-yield dividend stock on Robinhood happens to be one of the stodgiest tech stocks of them all: AT&T (T 1.02%). Should you choose to put your money to work in the telecom giant right now, you can expect a 7% yield that'll double your money roughly every decade if you reinvest the dividend. For context, the S&P 500's average yield is only 1.8%.
For the longest time, AT&T's telecom segment is what's made the company tick, and that's unlikely to change anytime soon. The difference is that AT&T finally has some key catalysts on the horizon that should lead to tangible organic growth. For instance, the rollout of 5G networks should be a multiyear growth driver for AT&T.
While upgrading wireless infrastructure won't come cheaply or occur overnight, we're talking about the first major improvement to download speeds in a decade. Consumers are going to be eager to upgrade their tech in the years to come, and that should mean plenty of high-margin data-centered revenue for AT&T.
Another core driver for the company is its push into streaming content. AT&T has contended with fairly consistent subscriber losses for its DirecTV satellite cable service and may consider selling the subsidiary to help reduce debt. At the same time, it's been pushing streaming content and HBO Max as alternatives for cord-cutters. Streaming may not seem like an immediate winner for AT&T, but it should help to partially or fully offset cord-cutting weakness.
Management is also focused on reducing debt by selling non-core assets and preserving the company's 36-year streak of increasing its payout. In other words, AT&T might be boring, but its payout is going to get the job done for income seekers.
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Pfizer
Another high-yield stock that Robinhood investors love is Big Pharma Pfizer (PFE 0.55%). Following the company's exit from the Dow Jones Industrial Average this past weekend, investors can expect to receive a hearty annual yield of 4%.
There's both promise and peril that comes with owning brand-name pharmaceutical stocks. On one hand, healthcare is a highly defensive sector that's rarely shaken by recessions. Since we don't get to choose when we get sick or what ailment(s) we develop, healthcare companies, including drug developers like Pfizer, can count on a steady stream of demand and cash flow.
The downside of Big Pharma is that brand-name drugs have finite periods of patent protection and sales exclusivity. Many of Pfizer's blockbuster drugs have lost their exclusivity in recent years, which has paved the way for generic competition to eat away at the company's revenue base. If there's a silver lining here, margins on established therapies remain very high, so it's not as if Pfizer's profitability is meaningfully threatened. But in terms of sales growth, Pfizer has been running in place for roughly seven years.
Mind you, there are pockets of strength within Pfizer. Cancer therapies Ibrance and Xtandi have been bright spots, while alliance revenue for leading oral anticoagulant Eliquis has increased by a double-digit percentage.
But it's been difficult for the company to overcome patent expirations. The pending merger of Pfizer's established drug unit Upjohn (which will be spun off) with Mylan will result in some of Pfizer's cash flow going away later this year. That means a dividend cut, albeit a small one, is almost certainly imminent.
While I don't believe Pfizer's yield will drop all that much, if at all, it's simply not a very compelling investment in the drug space.
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ExxonMobil
Robinhood investors are also big fans of integrated oil and gas giant ExxonMobil (XOM -2.78%), which happens to offer the highest yield of the platforms' 50 most-held stocks. Given ExxonMobil's awful performance over the past year and management's insistence on sticking with its payout, new investors can expect to receive an 8.7% yield. If this payout remains rock solid, it'll double shareholders' money if dividends are reinvested in a bit over eight years.
The obvious issue for ExxonMobil is that the coronavirus disease 2019 (COVID-19) pandemic has created unprecedented disruption in oil demand. Even with many of the major oil-producing countries scaling back their output, we've seen storage fill up with crude oil, dampening the outlook for a quick recovery in Brent or West Texas Intermediate pricing.
Given that ExxonMobil is a Dividend Aristocrat and has raised its payout for 37 consecutive years, its management wants to pursue every path possible before potentially cutting the company's payout. Thus far, ExxonMobil has slashed its capital expenditures budget by approximately $10 billion (30%) in 2020 and has been preparing to lay off workers to reduce its outlays.
Then again, ExxonMobil has the advantage of being an integrated oil company. With crude prices down, it's able to hedge by relying on its downstream chemical and refining operations. Make no mistake about it: ExxonMobil earns more when its upstream drilling and exploration segments are performing well. But having a diversified operating model helps the company navigate weakness better than most of its peers.
For the time being, ExxonMobil's dividend appears safe. However, the ability to continue making this payout will largely depend on whether or not the crude market sees a stabilization or rebound in oil prices over the next year.
