High-yield dividend stocks can offer attractive returns for investors. However, these stocks also tend to carry more risk and require careful analysis as a result. After all, a high yield may be a sign that a company is facing a substantial headwind that could necessitate a reduction in the payout.
Which high-yield stocks offer an attractive risk-to-reward ratio right now? Bristol Myers Squibb(BMY 0.34%) and Philip Morris International (PM -1.11%)are two attractively priced, high-yield dividend stocks that should deliver consistent levels of passive income for the foreseeable future. Here is a brief rundown of the pros and cons associated with each of these top-shelf dividend stocks.
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Too cheap to ignore
Bristol Myers Squibb, or BMS for short, has had a rough year. The company failed to meet analysts' expectations for its three biggest revenue drivers -- Eliquis, Revlimid, and Opdivo -- in the second quarter. Consequently, management lowered its revenue forecast for the year. BMS now projects a slight decrease in revenue in 2023, instead of the 2% increase it had previously predicted. The market reaction has been overtly negative, with shares of the company falling by a hefty 20.5% year-to-date.
However, this double-digit decline may represent a stellar buying for income investors. BMS' stock is currently valued at a near industry low 7.2 times projected earnings (compared to the average of 19.5 for its peers). The company also pays a generous 4.04% dividend yield, with a reasonable payout ratio of 59.4%.
Moreover, BMS has a robust pipeline of medicines for rare diseases and cancer that have high built-in pricing power. Although the company has a high level of debt (its long-term debt-to-equity ratio is 108.4%), its solid free cash flows and moderate revenue growth outlook for the next five years suggest that it can both pay down debt and continue to reward shareholders with a high-quality dividend.
An income powerhouse
Philip Morris, a top-tier tobacco company, is a tried and true passive income vehicle. Since becoming a publicly traded company in 2008, the tobacco giant has raised its payout every single year at a compound annual growth rate of 7.2%. That's one of the highest dividend growth rates within the large-cap space over the past 15 years.
At current levels, Philip Morris stock yields an impressive 5.64%, which is unusually high for a company of its size and stature. But there is a solid reason behind the company's tremendous yield. Namely, cigarette smoking is in decline around the globe and considerable uncertainty exists around the future regulatory environment for smokeless alternatives.
Philip Morris, for its part, has been investing heavily in its noncombustible offerings like IQOS (a heated tobacco product that releases nicotine-containing vapor) in recent years, and analysts think these next-gen products could ultimately sport even better profit margins than traditional cigarettes. Nonetheless, this regulatory issue is an important risk factor investors ought to bear in mind.
With Philip Morris' shares trading at under 14 times projected earnings, though, its rather modest valuation arguably already reflects a fair amount of this regulatory risk. In all, this tobacco stock should be a solid choice for income investors over the next five to 10 years, although it might be wise to keep any position on the smaller side because of the high degree of uncertainty over the long-term regulatory environment for noncombustibles.
