The Dow Jones Industrial Average's highest-yielding stock is telecom giant Verizon Communications (VZ 1.17%), with a nearly 7.7% yield. Next up is pharmacy chain Walgreens Boots Alliance (WBA 0.57%) at nearly 6.6%. Coming in third is industrial icon 3M (MMM 0.46%), with a yield of nearly 5.9%. Besides being in the Dow 30, all of these companies have something else in common -- they are dealing with big corporate issues.
Are the risks these stocks present worth taking on for dividend investors? Let's take a closer look at these three high-yielding Dow stocks and see if an answer presents itself.
1. Verizon: It just got worse
Verizon is one of the largest providers of telecom services in the United States. Although it owns legacy assets, like copper wire phone services and fiber optic systems, its big business is its cellular phone service. There are only a handful of meaningful competitors in the space, and the competition for customers is fierce. That makes sense; a cell network costs a lot to build, but adding new users isn't all that expensive once the system is up and running. The monthly bill customers pay and the relatively modest churn rate between services, meanwhile, creates an annuity-like income stream.
That's the good news. The bad news is that cellular technology is constantly improving, thus requiring constant investment. Falling behind would likely lead to big customer losses. So expenses are high and likely to remain so for the foreseeable future. Meanwhile, Verizon's debt-to-equity ratio, a measure of leverage, of 1.6 times is meaningfully above that of its closest peers. And just to add complexity, there's been an exposé about the telecom's use of lead in legacy cabling that could potentially lead to regulatory and legal headwinds.
Verizon has a high yield, but it is also facing a lot of costly problems. At the very least, more conservative investors might want to wait until the lead cable issue is better defined before buying the stock.
2. Walgreens: A thoughtful progression
Of this trio, pharmacy retailer Walgreens is probably the most attractive option. But don't ignore the risks here. Walgreens is in the process of rejiggering its business. This has been a multiyear process, and it's not over yet. Basically, management chose to exit the pharmacy benefits management business, selling its operations there to AmerisourceBergen (COR 0.47%). It is, instead, starting to build out a healthcare services business. The hope is to create a greater bond with customers and to push more prescription volume through its own pharmacy operations.
This is not a bad plan, but the new model is still largely untested. That said, Walgreens has increased its dividend annually for 48 consecutive years. That's a record to be proud of and one that doesn't happen by accident. It has survived corporate change before. And while Walgreens buying into and growing a medical services business is likely to be quite expensive, the company has a large position in AmerisourceBergen (thanks to the above-noted pharmacy benefit business sale) to tap for cash.
The stock needs to be monitored closely, so it probably isn't appropriate for investors who want to keep things simple. But if you are willing to put in the work, this could be an interesting high-yield turnaround stock.
3. 3M: No end in sight
Industrial giant 3M is the last name here and, like Verizon, is a fairly risky option. The company's business has been sluggish for a little while, but that's something that will likely pass eventually. Management invests heavily in research and development, and, at least historically, that has resulted in new technologies that the company leveraged to boost growth across its diversified business. The problem today is on the legal and regulatory fronts, and it could get very expensive.
There are two main problems. First, 3M is facing lawsuits related to earplugs it sold to the U.S. military. At this point, the legal costs are hard to quantify, with 3M winning some cases and losing some. But there are estimates that it could be more costly than the asbestos lawsuits that pushed a number of companies into bankruptcy. That's probably not going to happen here, but that doesn't mean the price tag won't be onerous.
On top of this, the company is cleaning up sites impacted by forever chemicals. It just agreed to a $10 billion legal settlement around forever chemicals, but that's just the start of the process. There are more companies and individuals that are likely to sue. All in, the legal and regulatory headwinds here are material but unpredictable with regard to timing and size.
Financially strong Dividend King 3M will probably muddle through, but for investors uncomfortable with uncertainty, it is unlikely to be a great stock to own.
Not for the faint of heart
Verizon, Walgreens, and 3M are all offering very attractive yields, but they all come with company-specific risks that investors need to consider carefully. The risks at Verizon and 3M include hard-to-predict legal and regulatory issues, so only the most aggressive and active investors should probably be looking at them. Walgreens' business transformation, meanwhile, is still an untested idea. Risk-averse investors might not want to jump aboard, though investors willing to keep close tabs on the progress being made might find the turnaround story appealing.
