There's usually a good reason for a high-yielding investment, and you should approach every chunky yield with skepticism. With interest rates as low as they are right now, a hefty payout should be a red flag instead of a dinner bell.
Altria (MO 0.12%) and H&R Block (HRB 0.59%) are dangling juicy yields of 6.3% and 4.7%, respectively. The payouts are tempting, but there's more to both companies than meets the eye. Don't let these household names lull you into thinking that these payouts will keep growing forever. Danger lurks in both of these iconic high-yielding stocks.
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Altria
In this low-interest rate environment, a high yield can be addictive, and that just happens to be Altria's strong suit given its market leadership in the addicting realms of smoking, vaping, drinking, and cannabis. The problem here is that sustaining its 7.3% yield will require taking on new dangerous habits.
You have to go back 20 years to find the last time that Altria posted annual growth higher than 6.3%, and this is with its penchant for acquisitions along the way. One can argue that cannabis offers upside and wine doesn't pack as much litigation risk as its other product lines, but at the end of the day, roughly 88% of Altria's revenue is coming from puffs of tobacco.
Right now, it may not seem like much of a problem. Altria's generating a ton of cash that it can deploy into stock buybacks that inflate profits on a per-share basis and offer modest dividend hikes. It sees low single-digit earnings-per-share growth in 2021. But the trend is still not Altria's friend.
Domestic cigarette shipments declined slightly in 2020, and that was with many of us working and learning from home. Is that trend really going to improve, now that we're back in public where the social stigma of smoking is only getting louder? Will the potential of new cigarette regulations snuff out any hope for a brighter tomorrow at Altria?
H&R Block
The fiscal year ends for H&R Block this week and it's not going to be pretty. This will be the fifth time in the last six fiscal years that the tax-prep icon posts a decline in revenue. Do you really think that H&R Block is going to turn things around in fiscal 2022?
There's a growing number of ways to file taxes for free or nearly free these days. H&R Block is a player there, too -- but the new model will never be as lucrative as the old one. H&R Block's 4.7% yield is endangered, even if the financial-services specialist will argue otherwise.
H&R Block points out that it has increased its dividend in four of the last five years, but is that the smartest approach when revenue has gone the wrong way in five of the last six fiscal years? Once the money starts running out for buybacks and sustaining its payout, income investors will head for the exits. Take a page out of the LIFO (last in, first out) and FIFO (first in, first out) accounting methodology, and make sure that you're the first out.
It's fine if you want to invest in dividend stocks as a way to secure some quarterly income, but don't assume that these aren't risky investments. Altria and H&R Block have blurry futures, and that could weigh on the direction that the stocks and their distributions go from here.
