Dividend stocks are an "all-weather" investing vehicle. In bull markets, dividend-paying stocks can ratchet up returns on capital through the power of compounding (when the dividend is reinvested). During bear markets, these types of equities can mitigate downside losses through their regular distributions. Not all dividend stocks are great buys, however.
Stocks with high yields (usually considered to be 4% or higher) can be a value trap. An abnormally high yield can indicate a company with deteriorating fundamentals and a poor long term outlook. Still, there are some high-yield dividend stocks that are dependable income vehicles. Here is a look at two blue chip stocks that offer annualized yields of 5.22% and 6.81%, respectively.
Philip Morris International
Philip Morris International (PM 3.83%) is the largest tobacco company in the world. PMI sports well-known brands such as Marlboro, it has a global commercial footprint, and it has made significant strides toward transitioning into a "smoke-free" company. Despite the worldwide movement to lower smoking rates, PMI's free cash flows have steadily ticked higher over the past 10 years, along with its share price.
Part of the company's enormous success over this period can be directly attributed to its reduced-risk tobacco product franchise. In the most recent quarter, PMI owned approximately 36% of this high-value product category. Smoke-free products are expected to keep PMI's top line moving in a positive direction over the balance of the decade.
Dividend-wise, PMI's 5.22% annualized yield is roughly 3 times higher than the average 1.7% yield of stocks listed on the benchmark S&P 500. While its payout ratio of 86.7% may seem high at first glance, PMI's high-margin business and rising free cash flows should help to cover its elevated payout. Moreover, PMI has increased its dividend every year for the past 14 years. This tobacco giant, in turn, is clearly dedicated to rewarding loyal shareholders via a top-notch dividend.
Verizon Communications
Verizon Communications (VZ 2.85%) is the largest wireless carrier in the United States. However, the telecom giant's scale and breadth of coverage hasn't made it a winning play for shareholders of late. Thanks to the capital-intensive nature of its business, and fierce competition from rivals like AT&T and T-Mobile US, Verizon's debt load hit $150.6 billion at the end of 2022. This enormous debt load is a key reason Verizon's stock price has floundered in recent times.
There are reasons to be optimistic about Verizon's future stock price performance, however. Apart from its enormous yield of 6.81%, Verizon's shares are trading at a mere 1.1 times sales, and at under 8 times trailing earnings. That's a bargain basement valuation for a blue chip dividend stock, especially for one that has raised its payout for 16 consecutive years.
What's more, Verizon should start to benefit from its enormous infrastructure investments soon. With a top-rated wireless network, and an economy of scale that comes with built-in pricing power, Verizon has levers to pull to accelerate growth in the years ahead. Meanwhile, investors can collect the Dow's highest yield.
