One of the most enticing numbers for a bargain-hunting stock picker is a high dividend yield.
Meanwhile, the S&P 500 index includes about 80% of the value of the entire U.S. stock market, including most of the big names.
Screening for the top 10 yielders in the S&P 500 gives us a nice way to combine those two concepts. Doing this periodically can be a good idea generator for income-focused investors interested in major companies that may be out of favor in the market.
Before we dive deeper, here are the current top 10 dividends:
- Macerich (NYSE: MAC) -- 9.0%
- CenturyLink (NYSE: CTL) -- 8.6%
- Iron Mountain (NYSE: IRM) -- 7.9%
- Macy's (NYSE: M) -- 7.0%
- Altria (NYSE: MO) -- 6.7%
- Occidental Petroleum (NYSE: OXY) -- 6.3%
- Nielsen (NYSE: NLSN) -- 6.3%
- AT&T (NYSE: T) -- 6.2%
- AbbVie (NYSE: ABBV) -- 6.1%
- Invesco (NYSE: IVZ) -- 6.1%
Next, some color and analysis on each. Read further for three things to do before buying any dividend stock.
1. Macerich (9.0%)
Macerich is a mall REIT. It specializes in "town squares" with major flagship stores, preferably in higher-income areas.
It has 51 million square feet of gross leasable area across 52 properties, so the typical property is close to a million square feet (think the size of about 500 houses).
An example of one of these properties is Eastland Mall in Evansville, Indiana. It's right around a million square feet with over 100 stores, including anchors J.C. Penney, Dillard's, and Macy's.
One thing investors should keep in mind before investing include the peculiarities of REITs, including that they have to pay out 90% of their taxable income as dividends to receive special tax status.
In addition, bricks-and-mortar retailer closures or bankruptcies and higher interest rates could negatively affect Macerich.
2. CenturyLink (8.6%)
CenturyLink is a major U.S. telecom that grew over the past decade with acquisitions including Qwest and Level 3 Communications. It serves both business and residential customers.
The combination of a levered balance sheet (i.e. high debt levels) and revenue growth challenges in areas like landline voice have seen its stock price fall fairly steadily the past few years (it's around a quarter of where it was five years ago).
The result is a huge dividend yield even with a dividend cut earlier this year. Hence, there may be opportunity for value investors who buy into CenturyLink's cost-cutting and stabilization efforts.
The Top 10 Highest-Yielding Stocks in the S&P 500. Image Source: Getty Images.
3. Iron Mountain (7.9%)
Iron Mountain's services are less well-known than many of the names on this list, but over 90% of the Fortune 1000 uses Iron Mountain.
As Iron Mountain puts it, the company focuses on "storing, protecting and managing, information and assets." For the most part, that means shredding documents or storing documents, but it also gets into data storage and can even brag about storing Frank Sinatra's master recordings.
Note: like Macerich, Iron Mountain is a REIT.
4. Macy's (7.0%)
Macy's has 800+ bricks-and-mortar locations under its namesake brand, Bloomingdale's, and specialty stores like Bluemercury.
Despite efforts by management to make Macy's "omnichannel" (i.e. grow online sales), its trailing 12 months' revenue is lower today than it was in 2007.
That said, Macy's is still profitable and is being proactive about making asset sales and making the most of its real estate holdings.
When you're dealing with a business facing industry decline, the last thing you want is management that buries its head in the sand. Bulls can take heart that Macy's management appears proactive and is working with a profit that results in a low P/E ratio and a nicely sized dividend.
5. Altria (6.7%)
Marlboro cigarette maker Altria has been an unbelievably great dividend stock over the decades.
Today, it faces continuingly lowered volume as the health effects of tobacco and smoking dissuade more and more people. Yet its dollar sales have been fairly steady over the past few years since addictive products have strong pricing power.
Altria has also bought itself optionality with large stakes in e-cigarette producer JUUL and cannabis company Cronos. That's especially true when you consider what Altria's brand power and distribution network could do to boost those operations.
6. Occidental Petroleum (6.3%)
Occidental has made many headlines for its pending $38-billion-dollar acquisition of Anadarko Petroleum.
It's a big bet (notice that it's roughly the size of Occidental's market cap) and one it had to outbid Chevron for by $5 billion to win. It's also been complicated and messy. To afford the deal, Occidental needed $10 billion in financing from Warren Buffett's Berkshire Hathaway and a side deal with Total to sell $8.8 billion of Anadarko's assets. It's likely both Berkshire and Total got good deals from a motivated Occidental. Meanwhile, activist investor and Occidental shareholder Carl Icahn has been complaining and looking to boost his influence on the board of directors.
On the organic side, Occidental's been lowering its cost structure to the point that it thinks it can fund its non-Anadarko operations and pay its dividend if oil averages only $40 per barrel. Even if we assume those estimates are accurate, an acquisition this large can have many hard-to-predict effects, both positive and negative.
And as with any company in the space, the underlying price of oil will have a massive role in determining success vs. failure.
7. Nielsen (6.3%)
Although well-known for its self-named TV ratings and other audience measurements, Nielsen's had problems growing its top line in recent years. With its share price already sliding for a couple of years, last summer Nielsen announced it was seeking strategic options.
In other words, it's been open to selling parts of itself or the whole enchilada. In the past year, reports have had various private equity players including The Blackstone Group and Apollo Global Management showing some interest in making offers. As of this writing, Nielsen is still accepting bids if there is actual interest.
Potential investors (especially those looking to buy and hold a high-yielder for years) should factor all the uncertainty into their decision-making.
8. AT&T (6.2%)
Like CenturyLink, AT&T is a major telecom that makes this top 10 dividend list. However, unlike CenturyLink, AT&T is quite profitable and seemingly stable.
It has both mobile and landline operations as well as acquisitions DirecTV (2015) and more recently TimeWarner (now WarnerMedia).
With both content and distribution in hand, AT&T promises to be a formidable player no matter how things shake out.
9. AbbVie (6.1%)
AbbVie is yet another company in the middle of an M&A event.
It recently announced an agreement to buy fellow drugmaker Allergan for about $63 billion.
The combination would diversify AbbVie's sales. Currently, more than half of adjusted sales come from anti-inflammatory treatment Humira (the world's #1 drug in 2018).
However, Humira and Botox (Allergan's top seller), face future competition via a patent cliff or a potentially superior alternative, respectively.
Someone considering AbbVie stock should think through both the effects of the massive combination and the longer-term viability of Abbvie's combined portfolio and pipeline.
10. Invesco (6.1%)
Invesco is an asset manager with over $1 trillion in assets under management. Its well-known funds include variations of its Invesco branding as well as its recently acquired OppenheimerFunds.
Profitability has been a strong suit for Invesco over the years. It's been consistent with strong profit margins (currently 15%).
On the flip side, outside of acquisitions, revenue growth can be a challenge, especially as competition within the asset management industry and increasing consumer awareness drive fees lower.
3 things to do before buying any dividend stock
Before buying any dividend stock (and especially a high-yield dividend stock), you should do these three things:
- Evaluate dividend stocks just as you would any other stock.
- Make sure you understand the special nuances if it's organized as a master limited partnership (MLP) or a real estate investment trust (REIT).
- Determine how sustainable the dividend is.
Evaluate dividend stocks just as you would any other stock.
This sounds obvious, but in addition to the general problem of investors getting carried away and neglecting to evaluate a stock as buying part of a business, dividend stocks have the specific problem of investors thinking of dividends as free money the stock is paying out.
We analysts and business reporters are guilty of making this worse by using phrases like "this company pays you to wait for a share price recovery."
Even the most educated and experienced of us can't help but gawk at high-yield dividends like the ones we've listed above.
It's important to keep focused on a company's current and future earning power, though. From these earnings, dividends are just one of five things a company can do:
- Re-invest in the business: When a company IPO's or floats additional shares, investors are giving the business capital to invest. Before giving some of that capital back via dividends, a company can reinvest its earnings to fund future operations, either for maintenance or growth.
- Mergers and acquisitions: In addition to organic growth, a company can grow by buying competitors or adjacent businesses.
- Share buybacks: In theory, buying back shares can be a more efficient way of returning capital to shareholders than dividends. You save shareholders the tax hit of dividends. Also, once one is established, a regular dividend is expected to be paid out quarterly and rise over time whereas there's more expectation for share buybacks to be lumpy at management's discretion. And if you have a management team that's smart about buying when shares are undervalued (a rarity, unfortunately), all the better!
- Build a stronger balance sheet: Paying down debt or increasing a cash balance gives a company added flexibility for future opportunities and helps protect against recessions, industry downturns, and problems of a company's own doing.
- Dividends: Paying shareholders out.
On why you may prefer the other options to a dividend, consider this admittedly imperfect thought experiment.
Someone you know starts a business and promises a 10% annual dividend yield. You say "Great!" and invest $1,000. And they do as they said they would. But they don't do anything except pay you $100 each year for 10 years until they run out of the money. Then they shut the company down.
Was the 10% dividend worth it?
Of course not! You don't want what amounts to a zero-interest savings account. You want a business to do something and make your $1,000 worth more than $1,000. Hopefully much more!
So make sure not to make the rookie investing mistake of thinking of dividends as "free money." Instead, dividends are what management does when it has no better uses for the capital.
That may sound like a ding on dividends, but it's not meant to be. Let's be clear that when it comes to what we care about -- investing results -- dividends are a wonderful thing.
Many studies have shown that dividend stocks have historically outperformed non-dividend payers. There are many theories as to why. For example, the fact that a company can pay a regular dividend is a signal that it's strong enough to produce enough cash flow to do so. Also, some would suggest dividends are a way of ensuring management discipline.
Make sure you understand the special nuances if it's organized as a master limited partnership (MLP) or a real estate investment trust (REIT).
Many companies that pay high dividends are structured as MLPs or REITs, especially in the oil and gas and real estate spaces.
In exchange for abiding by certain rules and limitations, companies in these structures get tax benefits.
The upshot for investors is that these companies tend to pay high dividends because MLPs are pass-through entities and REITs must pay out 90% of their taxable income. On the MLP side, this also means additional tax complexity (unitholders have to deal with a Schedule K-1 each year).
Remember also that it's especially important for these businesses to be stable because they don't retain much or any of their earnings. If cash needs arise, that can mean raising capital at inopportune times.
Determine how sustainable the dividend is.
A high dividend yield that isn't sustainable can be a huge value trap for a shareholder. When a dividend is cut, not only does the income go away, but the share price also tends to fall. Beyond the actual dividend cut, investors worry about the viability of the business and the competence of management. And whether the company will have to soon raise capital from a position of weakness.
A basic check on dividend sustainability is looking at a company's payout ratio. The payout ratio is simply the percentage of a company's earnings that is paid out in dividends. As a general rule of thumb, under 50% is preferred, but there are many nuances and exceptions. By definition, if a company's payout ratio is above 100%, it means its dividends are greater than its earnings and it needs to dip into its cash, borrow, or float some equity to pay up.
Let's look at a summary table of our top 10 dividend payers and see how they do on payout ratio.
Market Capitalization ($Billions)
Real Estate (REIT)
Storage and Information Management (REIT)
Oil and Gas
Data source: S&P Global Market Intelligence. As of June 27, 2019. *For REITs Macerich and Iron Mountain, the payout ratios are calculated using the industry-preferred funds from operation rather than net income.
At a high level, we can see that the price of a high dividend yield is often a high payout ratio. Notice that only Macy's has a payout ratio below 50%, and that was achieved with the help of unsustainable gains on the sale of assets.
This actually makes sense when you think about it. To achieve a huge dividend yield with a low payout ratio, you'd need a company that has both a beaten-down share price and a lot of earnings. For example, if a dream company had a dividend yield of 7% and a payout ratio of 30%, that would imply a P/E ratio of just 4.3.
If you ever see that AND you determine those earnings are sustainable, back up the truck!
Back to the real world.
A few other things you should note about some of the payout ratios above. Macerich and Iron Mountain are REITs, so their payout ratios are supposed to be very high (recall that they have to pay out at least 90% of their taxable income each year).
The ratios for CenturyLink and Nielsen are not meaningful because neither is currently profitable. Both were hit with large goodwill impairments that took them into the red. Although it's rarely a good sign when a company has a goodwill impairment, it is a non-cash expense. As a result, each company's free cash flow is positive and greater than its dividend payouts. This is an example of why it's a good idea to check out a company's payout ratio on both a net income basis AND a free cash flow basis.
Good luck investing!
Now that we've shared some initial analysis of this list of the 10 highest-yielding stocks in the S&P 500 and some tips on evaluating dividend stocks, it's up to you to decide whether any are interesting enough to research further. We're here to help!
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Anand Chokkavelu, CFA owns shares of Altria Group and Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.