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Danger Lurks for These 3 High-Yield Dividend Stocks

By Rick Munarriz – Sep 13, 2021 at 10:05AM

Key Points

  • Altria just hiked its dividend three weeks ago, but it will be hard for the tobacco giant to keep growing with its business model.
  • Dow Inc. has posted back-to-back years of double-digit percentage declines. Business is back in 2021, but analysts see another decline in 2022.
  • Lumen Technologies cut its dividend by more than half two years ago as another company. Don't let the new name fool you.

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Big yields might translate into big problems.

Interest rates are low, and that's bringing more fixed-income investors into the equity market. There are plenty of solid dividend payers out there, but some stocks are cruising for a bruising with their fundamentals relative to their payout levels.

Altria (MO 1.32%), Dow Inc. (DOW 0.94%), and Lumen Technologies (LUMN -1.43%) pack juicy yields between 4.6% and 8.4%. Some are household names, but that doesn't mean danger doesn't lurk in some of these high-yielding dividend stocks. 

A person approaching a piggy bank with a hammer behind the back.

Image source: Getty Images.

Altria 

Unlike the two other names on this list, Altria has been a steady grower. Revenue is moving higher for the 10th year in a row. The steady trickle of tobacco as well as acquisitions along the way into other vices -- vaping, cannabis, and drinking -- have kept the top line moving higher. 

It's never been noteworthy growth. Since 2001 the strongest annual revenue growth for Altria is a pedestrian 6.3%. However, the future is not kind. Domestic cigarette shipments dipped last year despite folks working from home, and between changing norms and new regulations we may finally be getting to the end of Altria's growth streak. 

Altria did hike its distributions last month. It has now come through with 56 increases over the past 52 years, now yielding 7.1%. This is great news, but with tobacco products continuing to account for the lion's share of Altria's business do you really think this is what you want to bank on for the future?

Dow Inc.

Dow Inc. may seem like an odd name on this list. The chemicals giant has paid out 440 consecutive uninterrupted dividends dating back to 1912. It trades at a low earnings multiple, easily able to cover its current 4.6% yield. 

Dow is also coming off a monster quarter where it posted net sales growth of 66%. The problem here is that volume actually only increased 9%. Tight supply and demand fundamentals helped Dow push through a 53% increase in local prices. It's not going to last. Dow's numbers will look great in 2021, but it follows back-to-back years of double-digit percentage declines. Analysts see revenue sliding again in 2022. 

The stock has a healthy payout ratio, but how comfortable are you owning a stock where net sales will have declined in all but one of a four-year run? Demand may seem steady for its polyurethanes and other packaging materials, but you need consistent growth to keep the distributions coming at today's heady pace. 

Lumen Technologies

A name change can only take you so far. Lumen is the company formerly known as CenturyLink, a struggling provider of regional and commercial telco services. Back out the acquisition of Level 3 four years ago and this should be its ninth consecutive year of organic revenue declines. 

Lumen's 8.4% yield is tempting, and it's going to woo income investors. The problem is that this hasn't ended well before. It had to slash its dividend by more than half two years ago. It cut its payout six years before that, too. 

In Lumen's defense, it's doing a few things right these days. Earnings and cash flow are moving in the right direction. It's making divestiture moves and it's earmarking the proceeds for growth investments and buybacks that will help shore up the quarterly disbursements. However, with growth expected to keep contracting through at least the next four years it's hard to lean on its chunky yield as reliable.  

There's more to investing in dividend stocks than chunky yields. Altria, Dow, and Lumen have generous payouts, but there are things that need to go right to keep those healthy distributions coming.

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Stocks Mentioned

Lumen Technologies Stock Quote
Lumen Technologies
LUMN
$5.51 (-1.43%) $0.08
Altria Group Stock Quote
Altria Group
MO
$47.63 (1.32%) $0.62
Dow Stock Quote
Dow
DOW
$51.55 (0.94%) $0.48

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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