High-yielding dividend stocks can be tempting to invest in because that means you're collecting more on your investment. But the danger is that a yield that gets excessively high can be due for a cut. And while you don't want to settle for the paltry 1.4% yield that the S&P 500 currently averages, you probably don't want to gamble on a stock that's paying in double digits either.
Omega Healthcare Investors (NYSE:OHI) and Altria Group (NYSE:MO) don't have yields that high, but at around 9% and 8%, respectively, they are definitely on the top end of the scale. Are these examples of dividend stocks that are too risky to be in your portfolio or could they be among the best deals on the stock market today?
1. Omega Healthcare Investors
Investors often rely on a real estate investment trust (REIT) to produce a steady stream of recurring income for their portfolios. That's because REITs are under an obligation to pay at least 90% of their earnings back to shareholders. But if profitability tanks, the dividend could too.
Omega Healthcare Investors focuses on senior care and has a total of 944 facilities devoted to that purpose, spanning the U.S. and U.K. markets. Traditionally, this would be a safe investment, but with COVID-19 hurting senior care homes, it hasn't been a popular place to invest. Year to date, Omega's stock has fallen about 20% while the S&P 500 is up more than 25%. The dropping share price is one of the reasons its dividend yield is now up to an incredible 9.3%. And although that is definitely high, Omega hasn't normally been a low-yielding stock as you can see in this chart:
A key way that REITs evaluate their ability to pay dividends is not by looking at net income but at funds from operations (FFO), which adjust out noncash expenses and other items. It's this metric that will dictate how likely it is for the company's payouts to continue.
In its most recent quarterly results ended Sept. 30, Omega's FFO was $0.73 per share. That's more than the $0.67 it currently pays in dividends and puts its payout ratio at 92%. That is still sustainable, and the business is doing better than it was a year ago. Through the first nine months of 2021, its FFO of $2.18 per share was 34% higher than during the same period of 2020. However, the company notes that its occupancy remains "meaningfully below pre-pandemic levels" and that "many operators continue to rely on federal and state government support."
For the near term, Omega and its yield do look to be safe. But with government funding helping prop up its operators (and therefore its numbers), this is by no means a buy-and-forget type of investment. Investors should tread carefully with this one. Although its yield looks great and appears safe right now, if the government pulls some of that support, Omega Healthcare's financials could look drastically different.
Tobacco giant Altria is another company that is paying a ridiculously high yield. It's right around 8% now -- and was even higher earlier in the year. But unlike Omega Healthcare, Altria's stock hasn't been crashing; it's up a modest 8% since the start of 2021.
The Dividend King has also raised its dividend by 4.7% this year, marking the 56th time it has hiked its payouts in the past 52 years. This kind of dedication to annual dividend increases should give investors added confidence in Altria's yield. After all, breaking such an impressive streak would be devastating for not just investors but also the company. It certainly wouldn't be an easy decision.
Altria targets a payout ratio that is 80% of its adjusted earnings per share (EPS). For 2021, the company projects that number will be approximately $4.60. Given that its dividend pays $3.60 annually, that puts its payout ratio at 78%, just slightly under its target. Between the company's track record and solid EPS (the guidance suggests a year-over-year growth rate of 5%), Altria's current yield doesn't appear to be all that risky.
In addition to being confident about the dividend, Altria also announced that it would be expanding its share repurchase program from $2 billion to $3.5 billion (and as of Sept. 30, it had $2.5 billion remaining). If a business was truly concerned about the safety of its dividend, it likely wouldn't be pursuing share buybacks.
This is a good sign of confidence in the company's future and makes Altria look like a much safer income stock than the higher-yielding Omega Healthcare Investors.