Identifying the highest dividend-paying stocks is as simple as a few internet searches, but an investor who buys stocks based on their dividend yield alone will likely face trouble.
High dividend yields, while attractive, also signal risk. The general relationship is that the higher the yield, the greater the risk. In short, investors should consider factors other than yield alone.
This list includes stocks with high dividends that also have reasonably strong business prospects. The purpose of these investments is to provide income.
Investors should expect these stocks to perform in a steady manner and yield a dividend that can be reinvested or simply used as income.
|Magellan Midstream Partner
|Simon Property Partners
Valuations are coming down. For investors in Altria (NYSE:MO) stock that’s a good thing. Highly overvalued equities continue to cool. In the case of Altria, that cooling has affected the company’s investment in the e-cigarette business, Juul.
Juul was valued at $38 billion when Altria bought its stake in 2018. However, the Food and Drug Administration recently ordered Juul to exit the U.S. market. That caused Altria to decrease its investment to a much smaller stake, now valued at $1.8 billion.
The value of Altria stock dropped before that announcement and now sits at prices near the $45 range. The cigarette giant has faced lots of scrutiny as the push to decrease smoking continues.
Interestingly though, Altria continues to perform well with earnings that continue to meet analyst expectations over the last several earnings periods. Those analysts believe MO stock should rise by a few more dollars. While that may not be especially compelling, Altria’s dividend yielding 7.91% changes the calculus entirely.
The second quarter wasn’t particularly kind to AT&T (NYSE:T). The company is a well-known dividend income play. It relies on free cash flows to pay those dividends to stockholders. So, when free cash flows encounter issues, those dividend investors get jittery.
Analysts were expecting the telecoms giant to report $4.7 billion in second quarter cash flows. The company reported $1.4 billion. That $1.4 billion was short of the amount necessary to cover its dividend for the quarter.
That sent some impatient investors heading for the exit and sent T stock from $20 to $18.
That’s an opportunity for investors, though. AT&T will pay the dividend and still anticipates reporting $14 billion in free cash flows in 2022. That would lead to a payout ratio of 57% which is still very healthy.
Magellan Midstream Partners (MMP)
Magellan Midstream Partners (NYSE:MMP) stock represents a midstream player in the pipeline transportation sector. It is certainly a risky play as its price chart indicates, with prices fluctuating between $45 to $54 several times this year.
At the time of writing it trades near $53, so it’s moderately priced. It’s the equity’s 7.87% dividend that should interest income investors in addition to that moderate price. Assuming MMP stock reaches $55 and its dividend remains unchanged, it would return 14.85% in a year.
The company has performed well in the past, returning 8.78% annually over the prevailing decade. That means that $10,000 invested then would have grown to $22,771 today. That’s without the benefit of dividends being reinvested into the stock meaning that holders could have simply used those dividends as income.
Sunoco (NYSE:SUN) stock, like MMP stock, represents an investment in the energy sector. Sunoco is a wholesaler, whereas Magellan Midstream is a transportation and storage firm.
Both firms pay high dividends with Sunoco’s yielding more than 8% at current prices.
Investors sometimes hesitate to invest in energy firms because their performance can be hit or miss. That said, Sunoco has been a stellar performer over the past decade, providing 15.51% annual returns during the period.
An investment held over that period would have multiplied in value by a factor of 4.2. Again, that doesn’t factor in any dividend reinvestment and assumes dividends were used as income during that period.
Sunoco had a monster Q1 with EPS figures of $2.39 per share whereas a $0.86 consensus EPS was expected. Q2 was more muted but still strong with a $1.16 EPS, above the $1.06 EPS consensus.
Simon Property Partners (SPG)
Simon Property Partners is engaged in the retail and commercial real estate sector. The upscale dining, shopping, and entertainment properties it owns aren’t subject to the same risk factors facing the housing market.
That said, SPG stock hasn’t been unaffected and ended Q2 with an EPS figure of $1.32, on the lower side of estimates.
There’s plenty of reason to remain optimistic: Simon Property Partners’ stock comes with a dividend of $1.75 per quarter. That was raised in the most recent earnings report and previously paid $1.50.
The company is developing international projects in Tokyo and Normandy, France that will open late this year and in the first quarter of 2023, respectively.
Lamar Advertising (LAMR)
Lamar Advertising (NYSE:LAMR) provides billboard advertising along with advertising in bus stops and airports among others.
It is exactly the kind of low-profile business model that investors should consider as tech continues to waver, and it comes with a 4.63% dividend.
The stock’s steady growth has outpaced that of the Nasdaq by 2.69% over the last 10 years. That speaks to the value of its business proposition and to its incredibly long run of success as a firm that’s 120 years old.
Lamar Advertising saw revenues increase 16.4% in the second quarter, reaching $517.8 million. Meanwhile, net income increased by 12.2% in the same period. That’s much better than many digital advertising businesses have done and speaks to the staid nature of the business model.
Dow (NYSE:DOW) is a well-known materials science firm with a strong presence in the chemicals sector. Investors seeking dividend income should really consider the stock and its 5.02% dividend.
Dow has beaten EPS expectations in the last four quarters. Despite that fact, it remains underpriced by roughly 7.4% based on its consensus target price.
DOW stock falls into the category of value stocks and most metrics indicate that it should trade at higher prices. Its P/E ratio is in the 90th percentile of chemical companies. Its P/E ratio currently sits at 6.2, well below its median of 11.4 over the last 10 years.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.