The S&P 500 has nearly doubled off its bottom last year and has climbed to new all-time highs. As a result, it has become challenging for investors to identify reasonably valued stocks with high dividend yields. In the current environment, many high-dividend stocks do not offer secure dividends, and their high yields are simply the result of a crashing share price.
When a stock offers a high dividend yield, investors should perform their due diligence before purchasing the stock. Otherwise, they run the risk of incurring a dividend cut.
Therefore, investors should be selective when it comes to high dividend stocks.
The three stocks we want to talk about today all have high yields and sustainable dividends, thanks to their unique competitive advantages and reasonable payout ratios.
The high yielders that we believe have secure dividend payouts are:
Altria Group (MO)
Altria sells cigarettes, chewing tobacco, cigars, e-cigarettes and wine under the Marlboro, Skoal, Copenhagen, and St. Michelle brands, among others. The company has also tried to diversify away from its flagship tobacco products as it has a 10% equity stake in Anheuser-Busch InBev (NYSE:BUD), a 35% stake in e-cigarette maker JUUL, and a 45% stake in the marijuana company Cronos Group (NASDAQ:CRON).
Altria has always faced a negative secular trend, namely the slowly declining percent of population that smokes. However, thanks to the inelastic demand for its products, the tobacco giant has been able to raise its prices at a much faster pace. As a result, it has grown its earnings per share at an 11.5% annual growth rate over the last decade. This is an impressive growth rate for a company whose volume sales have been under pressure.
In recent years, Altria has been facing intense competition from e-cigarettes, which have been gaining market share in the industry. In order to address this threat, Altria acquired that 35% stake in JUUL, the leader of this market. However, the company made that acquisition at the peak of the euphoria of the investing community over the growth potential of JUUL and thus Altria overpaid for that deal.
Even worse, the regulatory authorities have greatly restricted the marketing efforts of JUUL since then. As a result, Altria recently valued its stake in JUUL at a price that was 88% lower than the price it paid for it. Moreover, there is an ongoing trial, which may eventually force Altria to divest its stake in JUUL due to anti-trust issues. These negative developments have exerted pressure on the stock of Altria and thus the stock is now offering an exceptionally high dividend yield of 7.3%.
The flagship brand of Altria, Marlboro, has maintained a market share around 40%, despite the intense competition. Moreover, Altria has invested $1.8 billion in marijuana company Cronos while it is also trying to expand the reach of its own e-cigarette brand IQOS.
In the near term, the company should still generate enough cash flow to maintain its high dividend payout. Thanks to its consistent earnings growth and its excessive free cash flows, Altria has raised its dividend for 50 consecutive years. This is by far the longest dividend growth streak in the tobacco industry and places Altria in the group of Dividend Kings.
The company has a target dividend payout ratio of 80%, which means its 7.3% dividend should be considered secure.
AbbVie Inc. (ABBV)
AbbVie is a biotechnology company focused on developing and commercializing drugs for immunology, oncology and virology. It was spun off by Abbott Laboratories (NYSE:ABT) in 2013.
AbbVie has a short record as a standalone company but its business performance has been nothing short of impressive. Since the spin-off, the pharmaceutical giant has more than tripled its earnings per share, from $3.14 in 2013 to $10.56 in 2020. Even in 2020, which was marked by the fierce global recession due to the pandemic, AbbVie grew its earnings per share 18%.
Even better, AbbVie does not rest on its laurels. Instead, it continuously tries to identify new growth drivers. To this end, AbbVie acquired Allergan for $63 billion last year. As this amount is nearly one-third of the current market capitalization of AbbVie, this acquisition will obviously be a major growth driver in the upcoming years. The U.S. toxins market grew 30% in the first quarter of this year and has many years of strong growth ahead.
AbbVie is currently offering a 4.5% dividend yield. The reason behind the high yield is the expected expiration of the patent of Humira in the U.S. in 2023. Humira, a drug used in the treatment of rheumatoid arthritis, is the flagship drug of AbbVie. This has kept the stock trading at a persistently low valuation.
To be sure, Humira generated 43% of the total revenue of the company last year. The market appearse concerned over the expiration of the patent. However, AbbVie has done its best to ensure for a smooth transition after the expiration of the patent in the U.S. The company has two other auto-immune drugs in its portfolio, Rinvoq and Skyrizi. These two drugs are likely to make up for a significant portion of the expected losses in Humira revenue once it loses patent exclusivity.
Moreover, investors should note that AbbVie stock features that 4.5% dividend with a relatively low payout ratio of 42%, which provides a wide margin of safety for the dividend. Given the solid balance sheet of AbbVie and its resilience to recessions, the dividend should continue to grow each year.
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