In the realm of high-yield dividend stocks, 3M Company (MMM 0.46%) and Verizon Communications (VZ 1.17%) have attracted considerable interest from income investors in recent years, and rightly so. Both stocks offer yields exceeding the 6.5% mark, boast strong brand recognition, and are constituents of the Dow Jones Industrial Average.
Which of these high-yield Dow stocks is the better buy right now? Let's break down their respective value propositions to find out.
Image source: Getty Images.
The case for buying 3M
3M Company, renowned for its expertise in materials science, has a commendable legacy of distributing dividends for over a century and has consistently raised its payouts for 64 straight years. The company's stock is currently valued at a modest 9.7 times forward earnings, notably lower than the dividend group's average multiple of 29.
From a dividend sustainability perspective, 3M's payout ratio for the past year stands at 61.6%, which is on the higher side compared to other large-cap companies. Additionally, its dividend growth rate over the past five years is a mere 0.9%, falling well short of the 6.2% average for top-tier dividend growth stocks.
3M has an extensive portfolio of over 60,000 products and an unmatched record of innovation in material science. However, 3M's shares have still encountered a fair amount of turbulence recently. Legal liabilities arising from cases involving public water systems and Combat Arms earplugs have contributed to a whopping 48.9% decline in its share price over the past three years.
Moreover, 3M is in the process of spinning off one of its most stable and profitable divisions next month, into an independent healthcare entity to be called Solventum. While this decision has its advantages, it also introduces a degree of uncertainty for investors. Underscoring this point, 3M's shares have fallen by a hefty 26% since the announcement of the spinoff in July 2022.
Overall, 3M's stock is attractively priced, especially for a company with such a robust dividend yield and a history of consistent payout growth. Nevertheless, the current legal challenges and the impending healthcare-division spinoff present significant uncertainties. While this doesn't rule out a potential recovery for 3M, overcoming these obstacles may require several years.
The case for buying Verizon
Verizon Communications, a telecommunications giant, is a key player in the U.S. mobile network market. The company has made substantial investments in its 5G and fiber infrastructure to ensure top-tier service quality and extensive coverage.
Currently, Verizon's shares are trading at an attractive 8.6 times projected earnings, positioning it as one of the more compelling value plays within the Dow Jones. The stock also offers a solid dividend yield of 6.7%, although its payout ratio of 96% is a concern on the sustainability side of the ledger.
Over the last five years, Verizon's dividend has increased at a compound annual growth rate of 2%, which, while modest for a premier dividend growth stock, significantly outperforms 3M's growth rate. Its shares have also managed to gain a respectable 5.3% over the last 12 months:
Verizon is experiencing revenue growth above the industry average, thanks in part to its commitment to maintaining high-quality service. Wall Street analysts anticipate the company will achieve revenue growth in the low single digits over the next couple of years, surpassing the U.S. wireless industry's projected growth rate of 0.7%.
Verizon may not be a company with rapid growth. But its generous dividend -- and its strong performance and established position in a vital industry -- suggest that its financial outlook is relatively stable.
What's the verdict?
In this head-to-head match-up of high-yield dividend stocks, Verizon handily wins. The telecom giant has considerably fewer question marks regarding its core value proposition and dividend program.
3M, while possibly an intriguing contrarian buy for long-term investors, simply doesn't offer the same level of safety for income investors as Verizon. This margin-of-safety factor is further highlighted by Verizon's stock performance: While 3M's stock has trended downward, Verizon has seen a consistent uptick over the past year.
