In stock investing, stock price growth or decline usually gets the most attention because it's fairly straightforward: You buy shares at A price, and now they're Z price. However, that doesn't paint the full picture of an investment because it doesn't account for dividends.
You generally won't see dividends on a standard stock chart, but they can play a crucial role in total returns over time. The S&P 500 (^GSPC 1.02%) -- which tracks the 500 largest stocks -- is considered the primary benchmark for overall market performance as well as dividend yields.
The S&P 500's dividend yield isn't typically jaw-dropping at about 1.5%. Many companies in the S&P 500 have dividend yields much higher than this average, but that doesn't always make them good buys. Here are three companies in the S&P 500 with the highest dividend yields:
| Company | Dividend Yield |
|---|---|
| Altria Group (MO -0.37%) | 9.72% |
| Walgreens Boots Alliance (WBA 0.57%) | 7.22% |
| Verizon Communications (VZ 1.17%) | 7.10% |
Data source: Google Finance. Dividend yields are as of Dec. 27, 2023.
Despite the high dividend yields of these three companies, that alone isn't a good enough reason to invest. Let's take a look at each company and see if it's worth it.
1. Altria Group
Altria has consistently been one of the S&P 500's highest dividend-yield stocks. The first reason is that many people have moral reservations about investing in tobacco and similar products that are deemed harmful to health, so a high dividend is meant to attract (and retain) investors.
The second and not-so-good reason is that Altria's stock has struggled recently, declining more than 45% since its June 2017 peak.
Altria's dividend isn't in danger of being reduced or canceled, but a growing concern with the company is the declining rate of U.S. adult smokers. Between 2005 and 2021, the percentage of U.S. adult population that smoked went from 21% to 11.5%, and as the biggest tobacco company in the U.S., this has a tangible effect on Altria's cigarette volume.
Altria has been able to offset declining volume with higher prices, but at some point, the company will need a viable long-term strategy outside of cigarettes.
2. Walgreens Boots Alliance
Walgreens Boots Alliance owns the popular Walgreens drugstore chain, with thousands of locations nationwide. The company's stock fell 30% in 2023 even accounting for a strong rally in December.
My main concern with Walgreens Boots Alliance is its lack of profitability. In its fiscal year 2023, its revenue was $139.1 billion, up 4.8% year over year. However, it reported net losses of $3.1 billion during that span. In the past five years, Walgreens Boots Alliance's revenue increased by over 25%, but net income swung to net losses.
If the company doesn't turn the corner and regain profitability relatively soon, there's a chance the dividend could be slashed to relieve it from the cash drain.
3. Verizon Communications
Telecom giant Verizon has also had its fair share of recent stock price troubles, falling more than 33% in the past five years.
Verizon should be a top telecom company, but at some point it has to strengthen its balance sheet to put itself in a position for growth and to keep investors satisfied. The elephant in the room has been its growing long-term debt (more than $150 billion), especially amid high interest rates.
VZ Total Long Term Debt (Annual) data by YCharts
To stay competitive and up to date on telecom developments like 5G and emerging technologies, Verizon can't (or shouldn't, at least) drastically cut back on its capital expenditures, but dividend cuts shouldn't be off the table. That doesn't mean a dividend reduction will happen, but investors need to be aware of the risk.
I would encourage investors to focus on the index
Given the long-term uncertainty around these companies, I think investors are better off investing in an S&P 500 exchange-traded fund (ETF) like the Vanguard S&P 500 ETF (VOO 1.00%) or SPDR S&P 500 ETF Trust (SPY 0.95%) instead. It's far-fetched to think those ETFs would ever have a dividend yield remotely as high as the individual companies, but the trade-off is their stability.
A high dividend yield is usually good, but it can be misleading if it's not sustainable long term. The latter should be a main concern for investors. The S&P 500 ETF route won't let you down.
