When you take a list and sort it by dividend yield, the highest-yielding stocks are likely to have some warts. That's the case with the Dow 30. Is it worth buying Walgreens (WBA 0.57%) and its 8.6% yield, Verizon (VZ 1.17%) and its 7.9%, or 3M (MMM 0.46%) with a 5.9% dividend yield? Here's a quick look at each to help you decide.
1. Walgreens is making a big transition
Pharmacy giant Walgreens has been shifting its business in important ways. A few years ago, the goal was to get into the pharmacy benefits management (PBM) space, but that didn't work out so well. It eventually sold the PBM business it created to Amerisourcebergen (COR 0.47%). While having to admit to a strategic misstep wasn't great, Walgreens ended up with a huge position in Amerisourcebergen that it has been selling off in pieces to fund its next big idea: owning emergency clinics.
The idea seems reasonable, since pairing a doctor's office with a pharmacy could lead not only to more pharmacy orders but also a deeper relationship with the end customer. However, it is a very costly endeavor that will require a top-notch leadership team if there's any hope of having it go smoothly. That's the problem today, since the company just parted ways with the CEO who basically thought up the idea. There's no permanent replacement at this point, which is a bit worrying.
This surprise move suggests that the board of directors isn't happy with the company's progress. Investors don't appear to be, either, given the steep stock decline that has pushed the yield up to historic highs. Investors might want to wait until there's a permanent CEO before committing to Walgreens.
2. Verizon's costs are high and will remain that way
Verizon's business isn't nearly as complex. It's one of the largest cellular companies in the United States. With the increasing use of cell phones -- notably the mobile watching of video -- and the rise in the ranks of Internet of Things devices, demand for cellular bandwidth is likely to remain robust for years to come. That's the good news.
The bad news is that maintaining customer loyalty in the cellular space requires top-notch connections. Technology in the space is constantly improving, which means Verizon, and its telecom competitors, have to keep investing in their networks or they risk losing customers to the competition. So capital spending is important and likely to remain elevated for the foreseeable future. On top of that, Verizon has more leverage than its closest competitors, which puts it at a spending disadvantage.
VZ Debt to Equity Ratio data by YCharts
Of the three companies here, Verizon is probably the most attractive given its large customer base and annuity-like revenue stream. But investors need to understand that there are still material risks on both the balance sheet and with regard to upgrade execution if you want to collect the stock's fat dividend yield.
3. 3M's legal problems haven't entirely gone away
Industrial giant 3M is fighting a number of lawsuits. To the company's credit, it has been working to resolve them all and achieving some success in the effort. For example, it agreed to a $10.3 billion settlement with water companies over forever chemicals. It followed that up with a $6 billion settlement over product liability regarding earplugs it sold to the U.S. military. That's a lot of money, and there are probably more legal headwinds to come, since the company's forever chemicals agreement covers only a small number of claimants.
Those costs, which are likely to increase even further, will be a headwind to earnings for years to come as the payouts are made. And on top of that, 3M has decided to make some notable business changes because of its legal issues. For example, it has shut down its forever chemicals business -- another costly effort -- and it's spinning off its healthcare division, presumably to protect it from the legal headwinds. That last one is an issue when it comes to long-term growth, since healthcare was its fastest-expanding business. In all, important progress is being made, but there remains a lot of uncertainty about 3M's future. That should be enough to keep conservative investors on the sidelines until the fog has cleared a bit more.
High risks should keep most away
Companies' fortunes rise and fall over time. Walgreens, Verizon, and 3M are all in the downswing right now, which is why their yields are so high. If you're a conservative investor, you probably won't find any of them all that attractive. Indeed, you can find companies with similar yields -- midstream companies and REITs, for example -- that aren't facing the kind of negative business shifts this trio is dealing with. More adventurous investors might want to dig in here because of the big yields, but make sure you fully understand the risk/reward tradeoffs you're making.
