Income investors are often drawn to high-yielding stocks, unfortunately like moths to a flame. In the desperate pursuit for meaningful distributions in this low-interest-rate climate, some investors are taking on big risks on big dividends -- and it could all end up in a big mess.
Altria (MO -0.31%), AT&T (T -0.75%), and ExxonMobil (XOM -0.74%) are three well-known corporate giants yielding 8.6%, 7.3%, and 9.4%, respectively, as of Monday's close. Those are some pretty chunky dividend checks being cut, but don't let the household names lull you into a false sense of security. Danger lurks in all three of these iconic high-yielding stocks.
It may be surprising at first to see Altria's stock trading lower in 2020. One would think that the tobacco giant would be thriving through the COVID-19 crisis. Folks are spending more time at home, giving them more time to smoke cigarettes, vape, dabble in cannabis, and drink wine during the day without judgment. However, in this climate Altria's revenue rose less than 4% for both the third quarter and the first nine months of the year.
It's all downhill from here. Altria sells addictions that may have served as a creature comfort crutch during the pandemic, but smoking and vaping will only be less fashionably acceptable when we're back at work, school, and the next post-virus family reunion. There's a reason why it's been writing down its JUUL investment.
Altria's yield is beefy -- and it has boosted its payout 55 times over the past 51 years -- but is that sustainable? Altria's goal is to distribute roughly 80% of its adjusted earnings, but you can't trust this business model to keep producing at its current level. Altria's own long-term objective is to wean customers off of its combustible (in more ways than one) cash cow.
You may think that wireless carriers will be the real winners of the 5G revolution, but don't let that rosy conviction square off against reality. AT&T may be a mobile bellwether and a media giant after its Time Warner acquisition, but there are more holes here than a gopher-riddled golf course.
AT&T's legacy wireline business is shrinking. Don't tell me you still have a landline. Subscribers keep slipping for its DIRECTV satellite television platform. HBO Max activations have been slow to come around. On the studio front, AT&T had high hopes for Tenet and Wonder Woman 1984 this year but the former was a domestic dud at the box office and the latter is now being repurposed as a costly way to boost the profile of HBO Max.
The bad news doesn't stop there. The Warner deal has saddled AT&T with $187.7 billion in total debt. Total revenue has declined for five consecutive quarters. Adjusted earnings plummeted 19% in its latest quarter. Income investors may take comfort in knowing that AT&T's beefy dividends will be less than 60% of the more than $26 billion in free cash flow it expects to generate this year, but the future is cloudy. The 5G hype isn't universally delivering the promised speeds. CNN is facing a news market that's about to get more fragmented. The red flags are everywhere, and even the cheery Lily Adams from the AT&T spots won't be able to sugarcoat the uncertainties here.
The next administration won't be as kind to the fossil fuels industry as the current one, and things haven't gone so well for ExxonMobil anyway. The crude oil and natural gas giant has seen revenue fall in seven of the past nine quarters, and the trend is not its friend.
Shrinking profits can no longer cover the mammoth-sized yield, and you may be deluding yourself if you think we'll be consuming more gasoline five years from now. The biggest mistake that investors make in chasing high yields is that they trade capital depreciation for quarterly dividend checks. Ask investors who have owned ExxonMobil for all of 2020 if they think the 9% yield was worth the 44% drop in the stock price itself through Monday's close. Losing money -- and in this case a lot of money -- is the wrong way to invest in dividend stocks.