Investors often search for dividend-yielding stocks, taking dividend yield as the primary attribute—an indicator that demonstrates the annual dividends a company dispenses relative to its stock price. But it’s not enough to only understand a company’s dividend yield; it’s also crucial to comprehend why it’s at a particular level and if that’s something the company can maintain. To ascertain this, investors can check the company’s dividend payout ratio, a metric indicating the percentage of net income given out as the dividend.
Despite the numbers looking lucrative, it’s vital not to accept them at face value. There might be instances when a high yield is merely reflecting a stock price decline, potentially indicative of more significant underlying issues. Similarly, a high payout ratio necessitates caution. If a firm resorts to debt to maintain its dividend, thereby driving its payout ratio above 100%, it could be a sign that the dividend is potentially unsustainable.
Investors should remember that the primary aim of dividend stocks is to provide value and income; growth is an ancillary benefit. Therefore, a sustainable dividend yield paired with a secure payout is the key area for numerous investors, particularly those looking to buy and retain dividend stocks to buffer against market volatility.
For instance, consider Altria Group, one of the largest global tobacco conglomerates, and host to brands like Marlboro. Despite the change in societal outlook towards smoking, Altria has walked the extra mile for its investors. Over the past 15 years, Altria’s stock grossed a total return exceeding 609%, a hefty part of which comes from its stable 6.88% dividend yield.
As societal opinion pivots, so has Altria, by exploring alternatives like e-cigarettes, vapes, and heated tobacco. These moves are anticipated to encourage continued growth in revenue and profit. Besides, Altria’s price-to-earnings (P/E) ratio is just 9x, signifying under-valuation when compared to its historical data and the consumer staples stocks.
While a 68% payout ratio might make some investors apprehensive, it’s notable that this has dropped from the 100% mark it used to hover at 3-5 years back. This tapering indicates Altria’s strong potential to continue its existing 56-year streak of dividend enhancement.
United Parcel Service Inc, known popularly as UPS, possesses a dividend payout ratio surpassing 95%. But in this case, context matters. UPS’s high payout ratio is reflective of its stage as a mature business, rather than a sign of financial distress. In fact, it has had a higher payout ratio twice in the past 15 years, during economic downturns that arguably could have been more damaging to its operations.
Interestingly, on comparing the payout ratio with the company’s cash flow, the ratio is a considerably lower and more clinically acceptable 66%. With a turnaround strategy in action, improved profit margins are starting to become apparent. As the economy is expected to recover in the latter part of the year, doubts regarding the safety of the company’s dividends should start to dissipate.
Meanwhile, UPS’s stock is trading at a P/E ratio of approximately 14x, a lower figure compared to its historical averages. A 10-year total return of barely 45.22% might not appear impressive to growth-centric investors, but with a dividend yield of 6.29%, there’s clear appeal to those focused on dividends.
Verizon, for instance, is another desirable pick for dividend-focused investors due to its considerable 6.29% yield. Nonetheless, with elevating interest rates and persistent inflation affecting consumers, there are signs of strain in Verizon, as seen with the company’s recent quarterly loss of many net postpaid wireless subscribers.
Despite these concerns, with a historical average payout ratio in the mid-60s, Verizon’s dividend is generally viewed as secure. Moreover, the company’s acquisition of Frontier has received green light from the FCC (Federal Communications Commission), potentially granting Verizon a competitive edge against swifter rivals.
Just as with the other companies under review, Verizon’s stock is trading at a P/E ratio of roughly 10x, lower than its past averages. Hence, it appears to be undervalued, providing an attractive opportunity for investors seeking stocks with substantial and sustainable dividends.