Older investors are starved for income these days. With bond yields at or near all-time lows, getting steady income payouts in retirement is not so simple anymore. To help raise income, investors can pivot to stocks with high dividend yields. Extra risk comes with high dividend-payers, as they can cut their dividends at any time if the business goes south. This is why it is dividend investors should buy companies that operate in steady and predictable industries.
British American Tobacco (BTI -0.24%), Altria Group (MO 0.12%), and AT&T (T 1.88%) can double your money in under a decade with their ultra-high dividend yields. Here's why.
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British American Tobacco: 8.0% yield
British American Tobacco (also known as BAT) is a conglomerate of tobacco and non-tobacco nicotine products. It owns many popular cigarette brands, including Lucky Strike, Camel, and Newport. These combustible products make up the majority of BAT's revenue right now, bringing in 84% of consolidated revenue through the first half of 2021, and the majority of cash flow as well.
The other part of the business consists of chewing tobacco, vapor, and nicotine pouches. Through the first half of this year, vapor products revenue grew 50% year over year to $527 million, and nicotine pouches revenue increased by 64% to $167 million. These categories are still less than 20% of BAT's overall revenue right now, but can hopefully offset any declines in cigarette revenue as that industry continues to shrink.
Over the last 12 months, BAT generated around $11 billion in free cash flow and paid out just under $7 billion of that cash haul as dividends to shareholders. This might make you think the stock's 8.0% dividend yield can easily be continued and even raised over the next decade. But investors shouldn't forget about the $62 billion in total debt on BAT's balance sheet. The company should have room to steadily pay off this debt and refinance more debt while also paying out $7 billion in dividends a year. It will be important for investors to watch BAT's debt balance in relation to its dividend payouts and cash flow to see whether this high dividend yield is sustainable through the next decade.
Altria Group: 7.5% yield
Altria Group is similar to BAT, a tobacco/nicotine conglomerate with many different investments. Its core business is Philip Morris USA, which sells the popular Marlboro cigarettes. Besides this, it has a nicotine pouch brand called ON! that is rolling out to convenience stores across the U.S., and chewing tobacco products like Copenhagen and Skoal. The majority of its current revenue comes from Marlboro, though.
On top of these operating businesses, Altria has three minority investments. These include a 10% stake in Anheuser Busch (BUD 0.13%), a 35% stake in the vaping company JUUL, and a 45% stake in the cannabis company Cronos Group (CRON 0.41%). The Anheuser Busch stake is worth approximately $10 billion and can help Altria fulfill its dividend payments if it decides to sell all or part of its stake in the future.
Over the last 12 months, Altria has generated $8 billion in free cash flow and paid out $6.38 billion in dividends. This is a higher payout ratio than BAT; however, it only has $28 billion in total debt and the Anheuser Busch stake that can give it breathing room to maintain or raise its dividend. Management doesn't seem to be concerned, at least for now, with Altria's ability to pay its dividend, as it just raised its dividend per share from $0.86 to $0.90 a quarter.
AT&T: 8.6% yield
if you're not comfortable investing in tobacco companies, then AT&T may be up your alley if you're looking for an ultra-high dividend payer. The company is one of the largest telecommunications providers worldwide, with operations in both North America and Latin America. It also owns WarnerMedia, which houses the streaming/subscription TV service HBO.
AT&T is actually planning on spinning off WarnerMedia next year to Discovery (DISCA), offloading AT&T's media assets and helping it focus strictly on telecommunications. The deal is set to close in mid-2022 and will give AT&T assets of $43 billion in cash and debt securities. This will help the company manage its massive debt load, which sits at approximately $209 billion at the end of the last quarter.
AT&T is guiding for $26 billion in free cash flow this year and paid out $15 billion in dividends over the last twelve months. Investors should continue to track how much cash AT&T generates, as it will be tough to manage $200 billion in debt, but it should have room to manage its dividend and debt repayments over the next decade, especially once the WarnerMedia transaction is completed.
If you are planning on buying shares of stocks with ultra-high dividend yields, it is best to do so in a tax-efficient account like a Roth IRA. Dividends are taxed the same (most of the time) as capital gains, making them less efficient than a company that does share buybacks instead. Buying high dividend-yielding stocks in a tax-free account can help you avoid these high tax payments, and is most likely the best spot to keep stocks like the ones listed above.
