Should You Buy the 5 Highest-Paying Dividend Stocks in the S&P 500?

As a whole, the components of the S&P 500 have an average dividend yield of 1.6%, but there are a few exceptionally high-paying stocks in the benchmark index. In fact, the five highest-paying dividend stocks in the S&P 500 all have yields of at least 6.5%, and some have dramatically outperformed in recent years. Here's a rundown of each company, what it does, and what investors need to keep in mind before buying.

The five highest-paying S&P 500 dividend stocks

Data source: yCharts.

There are two key takeaways to notice from the information in the chart. First, you'll notice that the last row gives the yield and performance history of the S&P 500 as a whole. While the 1.6% overall dividend yield of the index is deceptively low because some S&P 500 components don't pay dividends, the point is that these stocks all pay dividends that are well above the average.

Second, it might seem odd to include a column of historical total returns in an article about high-dividend stocks, but there's a good reason. In a nutshell, dividends are only one part of overall stock performance. Total returns include dividends plus stock price appreciation. If a stock pays a high dividend but has a lousy track record of total returns (like Verizon), it's certainly worth taking into consideration.

With all of that in mind, here's a rundown of what each company does and how the business is performing.

1. Pioneer Natural Resources

Pioneer Natural Resources explores for and produces oil and gas. In fact, the first three stocks on the list are energy producers, and all have variable dividend policies. Since energy prices have soared in recent years, it shouldn't be a surprise that their dividends have been fantastic lately. Specifically, Pioneer's policy is to use three quarters of its excess cash to pay dividends.

2. Coterra Energy

Coterra Energy is an oil and gas exploration, production, and development company, and like the other top stocks on this list, has been a major beneficiary of rising energy prices in recent years. The company uses half of its quarterly free cash flow to pay dividends and uses the rest to primarily buy back shares. So, it's entirely possible that the stock's dividend will fall if oil and gas prices decline.

3. Devon Energy

The best performing stock on this list by a wide margin over the past three years, Devon Energy focuses on onshore exploration and production of oil and gas.

While it is currently one of the highest-yielding S&P 500 stocks, it's important to note that Devon Energy's dividend is so high because of higher energy prices, as the company's dividend policy is based on its quarterly cash flow and can vary significantly from one quarter to another. In 2022, its four quarterly payouts were $0.84, $1.11, $1.37, and $1.17. This type of dividend policy is clearly fantastic when energy prices are high, but it also isn't an ideal investment for people who want consistent income.

4. Altria Group

One of the largest tobacco companies in the world, Altria is the parent company of several massive cigarette producers, as well as minority stakes in e-cigarette maker Juul and cannabis company Cronos Group. The company's massive dividend is well covered by its cash flow and shares trade for less than 10 times forward earnings. On the other hand, the company's business is likely to decline over the long run as smoking rates continue to drop, and many investors simply have a moral objection to investing in a tobacco company.

5. Verizon

Verizon doesn't need much of an introduction, as it is well known as a leading telecom provider in the United States. It has also been the worst performing stock on this list, with a negative 21% total return over the past three years. There are a few reasons, including the fact that the company lost subscribers in 2022, and analyst predictions that earnings growth will be in the low single digits for the next several years. However, with a valuation of just 8.4 times forward earnings and a very profitable business, there's a solid case to be made for Verizon as a value play right now.

Are any of these stocks a buy right now?

It depends what you're looking for. As mentioned, the first three are energy producers with dividend payments that vary from quarter to quarter based on how much free cash flow the businesses generate. With energy prices expected to remain elevated for at least the next year or two, they should continue to have strong yields, but they aren't ideal for investors who want consistent income. On the other hand, the fourth and fifth stocks on this list have more consistent payouts, but their businesses are growing at a sluggish pace and likely have limited total return potential.