The Dow Jones Industrial Average is a collection of 30 blue chip stocks. Many of these long-standing, high-quality companies pay a dividend to shareholders, and these can be some of the most consistent dividend payers in the market.
But when dividend yields climb too high, it might be a warning sign for investors. A stock might have a high dividend yield because the outlook for the business (or the dividend itself) doesn't bode well. While the following three companies are all part of the premier blue chip index, investors need to dive deeper before jumping into a stock simply for its payout.
1. Verizon Communications (6.27% dividend yield)
Verizon Communications (VZ 1.17%) has offered a generous dividend for a long time, but its yield has moved substantially higher over the last 18 months. That's not a result of its dividend increases (although the company has raised its dividend for 17 years straight). It's the result of a significant decline in the stock price.
Verizon shares were punished as the company faced significant costs in building out its 5G network while seeing an exodus of customers. Meanwhile, the debt-laden business was challenged by rising interest rates, which presented a double-whammy for Verizon shares since investors could get a relatively high and safe yield from treasuries instead of buying Verizon's shares.
The company appears to have turned the corner, though. It saw a net increase of 100,000 in total postpaid phone customers in the third quarter, bolstered by its business segment. It built on that momentum in the fourth quarter with 449,000 net postpaid phone adds, showing significant strength in the consumer segment with 318,000 net additions.
Meanwhile, forthcoming interest-rate cuts should provide some nice support for the stock. Still, Verizon has the challenge to maintain market share in the wireless industry, and growth from its home broadband business may not be sustainable. There are better investment options in the telecom sector, although few yield as much as Verizon.
For investors who are particularly attracted to Verizon's dividend yield, the dividend is relatively safe. Verizon's free cash flow can support the current payout. And with the stock trading at around 8x management's outlook for 2024 earnings before interest, taxes, depreciation, and amortization (EBITDA), it's a fair value.
2. 3M (6.25% dividend yield)
3M (MMM 0.46%) has paid a dividend for more than 100 years and raised its payout to shareholders for 64 consecutive years. But its share price has fallen considerably faster than its dividend has increased over the past three years. That's resulted in a substantially elevated dividend yield, which now stands around 6.25%.
There are a few reasons for 3M's price decline. After strong sales growth amid the pandemic, thanks to surging demand for masks and respirators, 3M faced a hangover following the rollout of the COVID-19 vaccines and the end of mask mandates. Meanwhile, the company faced a lawsuit for its earplugs used by the U.S. Military. It settled that lawsuit in 2023, agreeing to pay $6 billion.
But there may be signs of other underlying issues for 3M as well. It's not spending as much on research and development (R&D) as it used to. R&D expenses, as a percentage of revenue, fell to just 5.6% over the past four quarters, near its lowest levels in the past decade.
Instead, it's relying more on acquisitions to fuel growth, which comes with a lot more risk and lower return on capital. That's a bit concerning, considering the company's biggest competitive advantage is its ability to innovate.
That said, the market's punishment of the stock may have gone too far after an 11% drop in the share price following 3M's disappointing 2024 outlook alongside its fourth-quarter results. Shares currently trade around 10x analysts' consensus estimate for its 2024 earnings per share. And with management prioritizing the dividend, it's hardly at risk of collapsing.
If you want a high-yield dividend stock with excellent prospects for annual raises, you could do worse than 3M.
3. Walgreens Boots Alliance (4.38% dividend yield)
Walgreens Boots Alliance (WBA 0.57%) held the title as the highest-yielding Dow Jones stock until earlier this month. Management slashed its dividend in half, alongside the release of its fiscal 2024 first quarter earnings report, ending a streak of 47 years of dividend increases.
The company suffered from pressure to raise its dividend every year, while earnings couldn't always keep up with the growing payout.
Meanwhile, the company's seen a significant decline in free cash flow, and the cost of borrowing has increased substantially. As a result, management had to make the tough decision to cut the dividend. Yet Walgreens Boots Alliance remains one of the highest-yielding stocks in the Dow Jones.
Walgreens faces challenges from online pharmacies and big-box retailers offering pharmacy services in their stores. In order to combat this competition, it's pushed into healthcare services with its majority stake in VillageMD. At one point, it counted over 200 full-service clinics inside Walgreens stores but is committed to closing 60 underperforming locations this year as part of its cost-cutting efforts.
Still, Walgreens' effort to expand beyond the retail pharmacy business could work out well. If customers are coming into its VillageMD locations to see a doctor, there could be valuable synergies with the pharmacy business.
Investors have punished Walgreens for the company's poor results and the dividend cut. That said, shares now trade around 7x analysts' consensus earnings estimate for 2024.
If you believe the worst is behind Walgreens -- that it can return to earnings growth and accommodate the new dividend -- the yield on the stock is still well above average. That said, there are better healthcare stocks available in the market.
