The S&P 500 has hundreds of dividend-paying stocks. Lately, those stocks haven't been paying out the way they used to. With the market's valuation still close to all-time highs (despite the recent pullback) and more companies opting for share repurchases over the last few decades, the average dividend yield among stocks in the S&P 500 is currently only 1.41%.
That yield seems rather pedestrian, and it's only slightly higher than the yield you can get from buying a one-year U.S. Treasury bill, which is yielding 1.13%. For investors with the goal of increasing their portfolio's dividend income, they need to go in search of individual stocks that still pay out a high dividend yield.
Here are four top dividend payers in the S&P 500 that investors might want to consider for their portfolios.
Image source: Getty Images.
1. Altria Group: 7% yield
Altria Group (MO 1.45%) is one of the largest tobacco sellers in the United States and owns the top-selling Marlboro brand. On top of cigarettes, the company sells other nicotine products like Copenhagen chewing tobacco, Black & Mild cigars, and On!, a tobacco leaf-free nicotine pouch. Finally, the company has three strategic investments in Anheuser Busch, Juul Labs (the vaping company), and Cronos Group (a cannabis producer). Most of its profits come from cigarette sales, but Altria Group has interests in all parts of the vice industry.
Altria's annual per-share dividend of $3.60 (paid out in quarterly installments) is funded by the company's annual free cash flow (FCF) per share of $4.46. Even though cigarette usage has declined in the U.S. for decades, companies like Altria Group have been able to maintain and even grow their cash flows through steady price increases and investments into harm-reduction categories like nicotine pouches. If you think growth in FCF per share can continue, Altria should be able to maintain or even raise its dividend each year. At these prices, that will provide investors a 7% yield on their investment each year.
2. Lumen Technologies: 9.3% yield
With the highest dividend yield on the list, Lumen Technologies (LUMN -6.20%) also has the most uncertain future. The American telecommunications company sells broadband, phone plans, and other digital services to individual and business customers. Like other broadband and internet providers, Lumen has fairly consistent demand from its end customers. So what is the catch? One word: debt.
As of this writing, Lumen Technologies has $29 billion in debt, only $354 million in cash and equivalents, and generates $3.6 billion in cash flow per year. While this isn't the highest debt load in the world (our next company takes that award), the amount of long-term debt compared to its annual cash flow is a bit concerning. There shouldn't be any near-term concerns, with less than $2 billion in debt due each of the next three years. This should give management plenty of room to pay back and/or refinance its debt while also fulfilling its dividend obligations. However, if the business stumbles even a bit or if interest rates rise significantly (which would increase Lumen's interest expense), the business could be in trouble.
If you're willing to take on a little more risk for a higher yield, Lumen Technologies could be a stock for you.
3. AT&T: 8.9% yield
AT&T (T -1.37%) is one of the largest wireless phone, internet/fiber, and video entertainment companies in the U.S. At the end of 2021, it had 67.3 million paid phone subscribers, 6 million fiber subscribers, and 73.8 million video subscribers across its HBO services. These large businesses, especially the wireless phone business, led AT&T to generate $28.6 billion in FCF in 2021. This is the fuel for its $2.08 annual per-share dividend, which is yielding 8.9% as of this writing.
Like Lumen Technologies, AT&T has a lot of long-term debt -- $179 billion, to be exact. This might seem daunting, but the company plans to mitigate some of this debt risk by spinning off its Warner Media division (which owns HBO) to Discovery. The deal will bring approximately $43 billion to AT&T in cash and debt securities.
The remaining AT&T company will be smaller (shareholders will have the option of owning the new Warner-Discovery stock) and plans to reduce its annual dividend payout after the transaction closes. However, the remaining company should still pay a strong dividend yield to investors, fueled by its durable wireless and fiber businesses.
4. Chevron: 3.4% yield
Last on our list is Chevron (CVX 1.04%), one of the largest oil companies in the world. The company is both an upstream and downstream oil business, which means it produces oil and also refines it and sells it to consumers and businesses. FCF has been a bit sporadic in the past decade (profits generally are tied to global oil prices) but hit $21 billion over the last 12 months, with oil prices recovering from the pandemic lows.
Chevron's stock has recently rocketed because of the recent spike in oil prices worldwide (higher oil prices mean more potential profits for Chevron). This has dragged down its trailing dividend yield to 3.4%, which is still high relative to the average S&P 500 stock but much lower than other companies on this list. However, if you believe high energy prices will stick around, Chevron will likely increase its dividend in the coming years due to all the new profits it will generate, making the stock a great potential income investment over the next five to 10 years.
