The S&P 500 index includes many well-established global companies that dominate their sectors. One common characteristic of a dominant business relates to it generates enough profits every quarter that it's able to pay out a consistent dividend payment. The fact that these companies pay a dividend at all is generally tied to the fact that such businesses are mature and don't need to reinvest all their profits back into the business to fund future growth opportunities. Instead, they return the wealth to their shareholders.
How much these businesses share through dividends can be complicated and varies from company to company. Those that share more tend to have a higher yield, and the higher the yield, the more interest there is from investors. The best companies maintain a balance and try to avoid returning more than they can afford.
With all this in mind, here are two high-yielding S&P 500 stocks that income investors might want to consider based largely on their generous dividends.
Image source: Getty Images.
1. Altria Group: Navigating a changing industry landscape
Altria Group (MO -0.37%) is one of the world's largest producers and sellers of tobacco, cigarettes and related products. For decades, cigarette volumes have been in secular decline within the United States market. Recognizing that it needed a pivot in its business, Altria has made several moves over the past two decades to move away from cigarettes as its main source of income.
Early attempts involved owning a majority stake in Kraft Foods for a time (which it later sold off) and splitting off its international division to form Philip Morris International. More recently, it orchestrated 2018 deals for stakes in e-cigarette maker Juul and Canadian cannabis producer Cronos Group for $12.8 billion and $1.8 billion, respectively. Unfortunately, none of these deals has worked out well for the company (all for different reasons). Altria Group exited the Juul deal recently and received a global license to some of Juul's heated tobacco intellectual property. As for the Cronos stake, its valuation has been significantly written down.
But not all hope is lost for the company: Altria Group's $372 million deal for an 80% stake in on! oral nicotine pouch holding company Burger Sohne in 2019 is paying off with a quickly growing retail share. The company also executed a $2.7 billion acquisition earlier this year of NJOY Holdings, which is working to get its NJOY ACE e-vapor product into tens of thousands of U.S. retail stores. Alongside the resiliency of its combustible cigarette business led by Marlboro, Altria Group's outlook is stable. Analysts forecast the company's non-GAAP (adjusted) diluted earnings per share (EPS) could grow by 4.5% annually over the next five years.
This respectable growth forecast, coupled with a stable dividend payout ratio of about 76% in 2023, should translate into slow and steady dividend growth. And with Altria Group's shares yielding 8.2% compared to the S&P 500 index's 1.5% average, it wouldn't take much dividend growth at all to make this an attractive pick for income investors. Finally, with the stock's forward price-to-earnings (P/E) ratio of 9.2 coming in well below the tobacco industry average forward P/E ratio of 12.1, the valuation appears to be buyable.
2. Verizon Communications: Providing highly in-demand services to customers
In the last 15 years, technology has drastically evolved: American consumers have overwhelmingly shifted away from the flip phones of yesteryear to the smartphones of today. And with the number of smartphone users in the U.S. expected to rise from 312 million in 2023 to 364 million by 2040, the demand for mobile data will continue to increase.
This bodes well for the telecom giant Verizon Communications (VZ 1.17%), which had nearly 115 million wireless connections as of March 31. This serves as the basis for the belief that the company's earnings will grow at a low- single-digit rate annually in the long run.
Combined with a 7.5% dividend yield, Verizon seems capable of providing income investors with huge starting income and modest growth potential. This is especially the case when considering that the company's dividend payout ratio is positioned to register around 56% in 2023. Such a balanced payout ratio should allow Verizon to upgrade its infrastructure, pay down debt, and further up the dividend. Best of all, the stock's forward P/E ratio of 7.5 is about in line with the integrated telecommunication services forward P/E ratio of 7.3. This makes Verizon an appealing pick for income investors at the current $35 share price.
