If you're an income-minded investor, there's certainly no shortage of compelling opportunities right now. Rising interest rates have not only led to higher bond yields but also to higher dividend yields among stocks.
Before plowing into the S&P 500's (SNPINDEX: ^GSPC) highest-yielding dividend payers simply because they're boasting the biggest payouts at this time, however, you might want to reconsider. Although you will drive more immediate income with these particular tickers, the strategy itself requires an important footnote.
The rest of the story
The five highest-yielding dividend stocks within the S&P 500 right now are Pioneer Natural Resources(NYSE: PXD), Devon Energy(NYSE: DVN), Altria Group(NYSE: MO), Coterra Energy(NYSE: CTRA), and Verizon(NYSE: VZ). Honorable mentions go to AT&T(NYSE: T) and KeyCorp(NYSE: KEY). You could own any five of these seven stocks and still be doing about as well as you would with any other five out of the seven in question.
| Company | Dividend Yield | P/E Ratio |
|---|---|---|
| Pioneer Natural Resources | 10.7% | 7.8 |
| Devon Energy | 8.6% | 5.9 |
| Altria Group | 8.2% | 14.6 |
| Coterra Energy | 7.9% | 5.2 |
| Verizon | 7.7% | 6.7 |
| AT&T | 7.5% | 6.8 |
| KeyCorp | 7.2% | 8.1 |
Except that this simple stock-picking strategy is plagued by one large flaw.
The "cheap stocks are cheap for a reason" warning applies here, to an extent. Although it's not a hard-and-fast rule, the market's highest-dividend payers also tend to be priced cheaply using earnings-based valuation measures. Pioneer's trailing price-to-earnings (P/E) ratio, for instance, is a mere 7.8, while Verizon's is only 6.7. None of these highest-yielding names are particularly expensive.
The more specific reason you might not want to jump on the S&P 500's highest-yielding dividend stocks, however, is that each company (or at least each dividend) is one problem away from big trouble.
Take Coterra, Devon, and Pioneer as examples. These three energy companies are generous in terms of turning a huge piece of their per-share profits into dividend payments. But their recent earnings have been unusually high solely due to crude oil's incredible rally between mid-2020 and mid-2022.
Oil prices have been sliding since that peak, though, as have these three companies' profits. If and when oil prices continue to fall, these decreasingly affordable dividends become even more unaffordable.
DVN EPS diluted (quarterly) data by YCharts.
In other words, these big dividend yields aren't necessarily built to last.
Altria is another high-yielding name with a crucial rest of the story. That's the slow-rolling end of the tobacco business. Data from Gallup indicates smoking within the United States reached yet another multi-decade low last year. Even Altria itself sees the writing on the wall, conceding "for adult consumers concerned about the health effects of tobacco use, the best thing to do is quit." To this end, the company is supporting its own program to help smokers do just that.
Altruistic? Yes. It's anything but a long-term growth driver, though.
As for Verizon and AT&T, the two companies are in the same boat. That is, the nation's mobile phone market is not only highly competitive, but it's also pretty well maxed out in terms of customers. Pew Research reports that 97% of adults living in the United States already own a mobile phone.
While there are opportunities for growth within the corporate services market, that's a drop in the bucket compared to the consumer market. Any meaningful growth for either business is going to come from sheer population growth.
Meanwhile, both companies' relatively large debt loads and relatively high payout ratios will cap future dividend growth.
Always look at the bigger picture
None of this is to suggest these companies are doomed, or that their stocks are worthless as dividend payers. You could own one, some, or all of them and survive ... at least for a while.
Rather, the point here is to illustrate how a purely numerical approach to picking dividend stocks can lead to unexpected trouble. There's always more to the story. When a dividend yield is abnormally high, it often means the market is picking up on the possibility that the dividend won't be easy to sustain, let alone grow.
So no, you shouldn't buy the S&P 500's highest-paying dividend stocks simply because they have big yields right now. Stock picking is still a top-down matter. Even income-seeking investors should weigh every aspect of a company before taking the plunge, looking specifically for longevity and sustainability. Not every name -- not even the large caps found in the S&P 500 -- offers that.
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James Brumley has positions in AT&T. The Motley Fool recommends Pioneer Natural Resources and Verizon Communications. The Motley Fool has a disclosure policy.
