Buying stocks based on one aspect of a company is a mistake, but often investors fixate on it. Income-oriented investors, for example, often give dividend yield too much influence in their investment decisions. This could be a mistake. Take three of the highest-yielding ones in the world S&P 500 Index as a starting point. Altria (NYSE:MO), AT&T (NYSE:T)And Healthpeak properties (NYSE: DOC) offer tremendous returns, but they all have their weaknesses, and one looks like it could be a terrible long-term investment. Here’s what you need to know before purchasing one of these.
Altria: Avoid dying companies
Altria has a huge dividend yield of 9.3%. It has been increasing its dividend regularly for years. It comes from the consumer staples sector, which is generally considered a conservative area of the market. Additionally, the company has a dominant position in the market it serves as it owns the iconic Marlboro brand. This last fact is actually the problem.
Altria is a tobacco company that sells cigarettes in the United States, where smoking is increasingly frowned upon. To cut to the chase, the company produced 76.3 billion cigarettes in 2023, compared to 101.8 billion cigarettes in 2019. That’s a 25% decline in just five years! The company has managed to offset the effects of the decline in volumes through continuous price increases. But at some point, price increases are likely to exacerbate the decline. For most investors, it’s better to avoid a business that appears to be in long-term decline.
AT&T has a dominant position but is heavily in debt
AT&T has a respectable dividend yield of 6.7%. The dividend has been increased annually for years. It is one of a few large, dominant wireless carriers in the United States. The supply network is large and would be difficult and expensive for an emerging company to replace. In other words, AT&T has a solid position in a business that attracts a large group of loyal customers who happily and reliably pay their monthly wireless payments. AT&T generates plenty of cash flow to support its dividend.
The problem with AT&T’s business is that it is capital intensive. Not only was it expensive to build, the company also has to maintain it and upgrade it as cellular technology advances. Because of this, AT&T’s balance sheet is heavily leveraged. While the use of debt is not uncommon in the mobile phone space, its debt-to-equity ratio of 1.3x is not the lowest in its peer group and has increased 40% over the past five years. Although the dividend is likely safe, investors need to understand that AT&T’s balance sheet needs to be closely monitored.
Healthpeak Properties is designed to pay dividends
Healthpeak Properties is a little different from the other two stocks here, as it is a real estate investment trust (REIT). This is a business structure specifically designed to pass on income from institutional-level rental properties to investors in a tax-efficient manner. The high dividend yield of 6.6% is nothing unusual in the REIT sector. Still, it’s important to understand exactly what Healthpeak Properties does.
This REIT, as the name suggests, owns medical real estate, specifically medical practices and medical research facilities. Given the increasing size of older age cohorts, this should be an attractive focus over time. However, buying property typically involves taking on debt, and interest rates have been rising recently. This will lead to higher operating costs, a fact that has investors worried about the near-term trajectory. Financial results for the fourth quarter of 2023 remained essentially at the same level as the previous year. So there is cause for concern, but over time it is very likely that Healthpeak will be able to continue to pay a reliable and sizeable dividend given its business focus.
There is one you should avoid, two you should get to know
Ultimately, most investors will likely want to avoid Altria’s high yield and slowly dying business. AT&T and Healthpeak are much better companies to spend your valuable time researching. However, both of these high-yield stocks are struggling in the short term, although in the long term their strong businesses will likely allow them to continue paying dividend investors good dividends for sticking around.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Healthpeak Properties. The Motley Fool has a disclosure policy.
Should you buy the three highest dividend stocks in the S&P 500? was originally published by The Motley Fool