Money-market funds and Treasury bills are offering strong competition for high-dividend stocks with short-term rates above 5%, but they aren’t the only game in town.
There are a group of stocks that comfortably exceed the 5.4% yield on T-bills and also trade cheaply, for less than 10 times projected 2023 earnings per share.
They are the six highest-yielding stocks in the S&P 500:
Walgreen Boots Alliance
(WBA) . All six stocks are in the red this year with Key, Truist and Walgreens down by more than 25%.
Altria yields 8.8%; Verizon and AT&T, 7.9%; KeyCorp, 7.5%; and Truist and Walgreens, 7.3%. They are the only stocks in the S&P 500 with yields above 7%.
With outsize yields comes some risk, but all six companies cover their dividends comfortably. Managements remain committed to making the payouts.
Altria, whose shares trade around $43, fetches about nine times projected 2023 earnings of $5 a share. The company takes its outsize dividend seriously and aims to increase it at a mid-single digit annual rate as it transitions its business toward smoke-free products.
Its low valuation reflects concerns about its core cigarette business, which is led by Marlboro, given continuing declines in sales volume. The ultimate profitability of the smoke-less ventures is a second worry.
In recent years, Altria has increased its payout in August, so a dividend boost could be coming soon. The Bloomberg consensus calls for a boost in the quarterly payout to 98 cents from 94 cents this month.
AT&T and Verizon shares, at around $14 and $33, respectively, are down over 15% this year. Two factors are behind that: worry about competitive pressure in wireless and more recently, potential liabilities from lead in old underground cables, a concern raised by reporting in The Wall Street Journal.
Barron’s has argued that the dividends look safe, and that is the view of management as well. Verizon talked about potential dividend increases on its earnings conference call in July.
Key and Truist, meanwhile, have been hammered along with other regional bank stocks this year. Key shares trade around $11, and Truist at $34.
Their second-quarter earnings disappointed analysts at KBW, but both put a priority on their dividends. Truist, in particular, covers its payout comfortably. Both stocks trade for about nine times projected 2023 earnings and have good regional banking franchises.
Walgreen also has had a disappointing year. In June, the company cut its forecast for profit for the 2023 fiscal year by more than 10% to about $4 a share. The stock is so out of favor that it trades for about seven times the earnings expected for the fiscal year ending this month.
James Kehoe, the chief financial officer, said on the most recent earnings conference call in June that the company is “very committed to maintaining our investment-grade (credit) rating and our dividend.”
All six stocks offer nice yields. They could amount to turnaround stories in a market skeptical of their prospects.
Write to Andrew Bary at [email protected]