Understanding the Risks of High-Yield Dividend Stocks
Understanding the Risks of High-Yield Dividend Stocks
It is understandable that dividend investors often start their search for investment candidates by looking at dividend yield. However, merely picking the highest-yielding stocks is unlikely to be a winning strategy over the long term. Investors need to dive deeper into the fundamentals of a company to make informed decisions.
A look at some of the highest-yielding stocks reveals important insights. Companies like Walgreens Boots Alliance (NASDAQ: WBA), Altria Group (NYSE: MO), and Verizon Communications (NYSE: VZ) offer high dividend yields, but the underlying risks may make these stocks less appealing than they seem at first glance.
Walgreens is Struggling
No dividend investor wants to see a dividend cut, yet that is precisely what Walgreens did recently, reducing its quarterly payment from $0.48 per share to $0.25. This drastic move signals significant issues within the company.
Walgreens has faced challenges after its ventures into drug benefit management did not yield expected results. Subsequently, the company pivoted to opening emergency medical clinics, which also fell short of expectations. A leadership change, with a new CEO now at the helm, indicates that Walgreens is attempting to streamline its operations amidst these setbacks. The dividend cut adds to the company’s negative public perception.
Currently, Walgreens boasts a hefty 9.7% dividend yield but this reflects a consensus among investors that the company is high-risk. While it may appear attractive, most investors might be better off steering clear of Walgreens stock for now.
Altria has Many Missteps to Make Up For
Altria, a leading cigarette manufacturer in the United States, controls the well-known Marlboro brand. However, the company has been grappling with a long-term decline in cigarette volumes, experiencing a notable 13% drop year-over-year in a recent quarter.
In response to dwindling volumes, Altria has raised prices, but this strategy can only be successful up to a point before consumer demand subsides. Additionally, Altria has attempted to branch out into new product categories, investing in alternatives such as marijuana and vaping but has encountered failures, most notably with Juul. The spin-off of Philip Morris International (NYSE: PM) has led to increased competition, complicating Altria’s efforts.
Despite this context, Altria manages to maintain an approximate 7.8% dividend yield. The price increases have allowed continued annual dividends, and the acquisition of NJOY (vapes) shows some promise. However, with a troubled core business, Altria may not offer the best risk/reward profile for investors.
Verizon: A Good Company in a Competitive Business
Among these three stocks, Verizon (NYSE: VZ) may hold broader appeal due to its solid 6.4% yield supported by a growing dividend. As a key player in telecommunications, Verizon benefits from customer loyalty and a substantial infrastructure built over years.
However, the company faces intense competition that necessitates ongoing, substantial capital investments. Keeping ahead of competitors amidst rapid technological advancements is crucial, adding risk to Verizon’s operations. Although its leverage is higher than that of immediate competitors, Verizon remains better positioned compared to Walgreens and Altria regarding stability.
Looking Past the Dividend Yield
While it is valid for dividend investors to use yield as an initial indicator of potential stocks, the cases of Walgreens, Altria, and Verizon exemplify the importance of thorough examination. Often, high yields come with significant risks, prompting the question of whether those risks are worth assuming. In many scenarios, the answer could very well be no.
Frequently Asked Questions
What are the main concerns with Walgreens Boots Alliance?
Walgreens has faced struggles with recent ventures, leading to a significant dividend cut, indicating that the company is under pressure financially and operationally.
How is Altria Group responding to declining cigarette sales?
Altria has raised prices to offset declining volumes and has also attempted to diversify its product offerings but faces challenges in emerging markets.
Why might Verizon be a more stable investment choice?
Verizon has customer loyalty and a solid infrastructure underpinning its operations, although it must continue to invest heavily to keep up with competition.
Should dividend yield be the only factor to consider?
No, while yield is important, investors should also assess the company's overall financial health and market position before making investment decisions.
What is a potential downside of investing in high-yield stocks?
High-yield stocks may come with high risk, including potential dividend cuts and volatility in stock performance, making thorough analysis essential.
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