If you're looking for dividend stocks that can turn a modest investment into a significant source of passive income, you may want to turn your attention to the S&P 500 index. At the moment, a pair of its components, Altria Group(NYSE: MO) and Walgreens Boots Alliance(NASDAQ: WBA), offer mind-blowing dividend yields of about 8.2% and higher.
Stocks rarely offer yields above 8% unless investors have reason to assume dividend growth in the years ahead will stall. Here's a look at these two ultra-high-yield dividend payers to see if they're good stocks to buy now and hold over the long run.
1. Walgreens Boots Alliance
With nearly 9,000 stores spread across all 50 states, and a few thousand more stores in Europe and Latin America, retail pharmacy chains don't get any bigger than Walgreens Boots Alliance.
Unfortunately, economies of scale aren't much of an advantage when pharmacy benefits managers (PBMs) run by insurance companies can dictate reimbursement rates on prescription drugs.
Cigna, UnitedHealth Group, and CVS Health operate the largest PBMs. Their contracts with pharmacies are famously secretive, but it doesn't look like they're giving Walgreens its fair share. The giant pharmacy chain reported a $13.2 billion operating loss in its fiscal second quarter that ended on Feb. 29.
Unfavorable reimbursement rates aren't the only problem weighing on Walgreens' bottom line. Its attempt to expand beyond retail and become a provider of healthcare services has been a disaster. The big operating loss in its fiscal second quarter was partly due to a $5.8 billion impairment charge associated with its VillageMD investment.
VillageMD is a joint venture with Cigna that was supposed to manage hundreds of full-service health clinics colocated with Walgreens pharmacies. The venture took a big step back in May when Walgreens said it would close about 160 VillageMD clinics this year.
Walgreens slashed its dividend, but the stock price has fallen so far that at recent prices it still offers a huge 8.7% yield.
Walgreens stock has been beaten down so far that folks who buy the stock now could realize market-thumping gains if earnings stop shrinking. The stock has been trading for the extremely low multiple of 4.0 times forward-looking earnings expectations.
Second-quarter retail pharmacy sales in the U.S. rose 4.7%, but the segment still reported adjusted operating income that fell 29.5% year over year. Walgreens might look undervalued, but a deteriorating profit margin for its U.S. pharmacy segment is a red flag, warning us to avoid this falling knife for now.
2. Altria Group
Altria Group is the tobacco company that sells the Marlboro brand in the U.S. Marlboro still has a leading share of the market for combustible cigarettes, but that market is shrinking fast. The company sold 10% fewer cigarettes in the first three months of 2024 than it did in the previous-year period.
A stock market concerned with sinking sales has Altria Group stock under so much pressure that it offers an eye-popping 8.2% yield. That's a lot more than you'd expect from a business that raised its dividend 58 times over the past 54 years.
Altria Group's first attempt to transition customers from combustible tobacco to e-vapor products with Juul was a little too successful. In 2020, the Food and Drug Administration (FDA) banned the fruity flavors that made Juul a hit with adults and teens, but enforcement hasn't been very strong. Altria Group has since sold Juul and acquired NJOY, an e-cigarette manufacturer that markets FDA-authorized products.
These days, Altria Group has to compete with illicit disposable e-vapor products such as Elf Bar. You won't find illicit e-cigarettes at major retailers like Walgreens, but independently owned tobacco shops and gas stations regularly display them right next to Altria Group's relatively flavorless NJOY brand.
Despite combustible cigarette shipments that sank 10%, Altria Group reported first-quarter sales after excise taxes that contracted by just 1% year over year. An ability to raise prices on Marlboros and transition smokers to other products is allowing the bottom line to move in the right direction. Management expects earnings per share to rise by 2% to 4.5% this year to a range between $5.05 and $5.17 per share.
In June, Altria's NJOY brand received the first FDA authorization for a menthol-flavored product, which could help it compete with illicit flavored vaporizers. Cautious investors probably want to wait for signs of success from NJOY, as well as increasing enforcement of the FDA's flavor ban, before taking a chance on this stock. For those with less aversion to risk, starting a relatively small position looks like the right move to make now.
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Cory Renauer has positions in CVS Health. The Motley Fool recommends CVS Health and UnitedHealth Group. The Motley Fool has a disclosure policy.
