Should You Buy the 3 Highest-Yielding Dividend Stocks in the S&P 500?

Understandably, dividend investors often begin their search for investment candidates by looking at dividend yields. But just picking the highest yielding stocks isn’t likely to be a winning strategy over the long term. You need to do more digging.

A look at the three highest-yielding stocks in the S&P 500 index, Walgreens Boots Alliance (WBA), Altria Group (MO 0.77%)and Verizon Communications (See 1.28%)helps explain why.

Walgreens is struggling

If there’s one thing no dividend investor wants to see, it’s probably going to be a dividend cut. But that’s exactly what Walgreens did in early 2024, taking its quarterly payout from $0.48 per share to $0.25. That’s almost a 50% reduction in pay, something a company wouldn’t do without a very good reason.

In Walgreens’ case, the reason is that the company is struggling. Its efforts to expand into drug benefit management were unsuccessful. Then he switched gears and started opening emergency medical clinics, which didn’t go as well as planned. The CEO who orchestrated the clinical effort has stepped down, and the retailer is now working to streamline its operations under a new CEO. And then there’s the dividend cut to add to the company’s negative press.

Overall, Walgreens’ consistent 9.7% dividend yield is an indication that investors believe the company is a high-risk investment. At the very least, it’s a high-risk upside action, which is something only the most aggressive investors should own. Most will be better off avoiding Walgreens stock today.

Altria has many faults to make up for

Altria is one of the largest cigarette manufacturers in the United States, with control of the largest brand on the market (Marlboro). But there is a small problem. Cigarette volume has been in a long-term decline. For example, in the second quarter of 2024, cigarette volume fell by 13% year-on-year! The company is not ignoring the problem and is compensating for the drop in volume by raising prices. But it can only do this so many times before consumers start giving up.

It has also tried to invest in new product categories to find a replacement for its declining core operations. This process did not go well, with failed investments in marijuana and vaping (Juul). It also ended up creating a competitor in the non-cigarette space when it spun off Philip Morris International (P.M 0.60%) to own his foreign cigarette business. Philip Morris International is now entering the US market with its own non-fuel offerings. That’s the background behind Altria’s whopping 7.8% dividend yield.

In fairness, the price increases have allowed Altria to continue to increase its dividend annually. And the company added NJOY (vape) to its roster, a move that fared much better than the Juul investment. But this is still a consumer core company with a deeply troubled core business that probably isn’t the best risk/reward option for most investors.

Verizon is a good company in a competitive business

Of the three stocks here, Verizon will likely have the most widespread appeal. It has a high yield of 6.4%, supported by a growing dividend and well-positioned business. Indeed, it is one of a small number of current telecommunications providers in the United States. It would be difficult, if not impossible, to replace the cellular infrastructure that Verizon has. And customers tend to be quite loyal, leading to annuity-like income streams.

The problem is that keeping up with Verizon peers is a constant battle that requires heavy capital investment. Staying behind is not a good option, so the competition is quite fierce, and the costs are always quite material, given the constant improvement of technology. This is where the big risk comes in, as Verizon’s leverage is greater than that of any of its closest peers. This increases the risk, although Verizon remains a better positioned company than Altria or Walgreens. For ultra-conservative dividend investors, Verizon is probably a pass, but for most it will likely be worth a deep dive.

Look beyond the dividend yield

There’s nothing wrong with a dividend investor using the dividend yield as a first cut to find stocks to look at. But the quick overview of Walgreens, Altria and Verizon highlights how important it is to look deeper than dividend yield. When you do this, you’ll find that high returns often come with high risks. The question is whether these risks are worth taking. Most of the time, the answer will be no.