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:
Dividend Stocks: Altria Group (MO)
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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)
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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.
Dividend Stocks: Enbridge Inc. (ENB)
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Enbridge is a midstream oil and gas company headquartered in Canada and operates in four segments: Liquids Pipelines, Gas Transmission, Gas Distribution and Green Power. Through its immense pipeline networks, the company transports approximately 25% of North America’s crude oil and 20% of the natural gas used in the U.S. It is also the largest distributor of natural gas in the U.S. by annual volumes.
Enbridge has grown its dividend (in CAD) for 26 consecutive years, at a 10% average annual rate. Given the boom-and-bust cycles of the energy sector, which are caused by the dramatic swings of commodity prices, the dividend growth record of Enbridge is certainly impressive.
Enbridge is one of the most resilient oil companies to recessions thanks to its robust business model. The company has a toll-like, fee-based business model, which involves charging fees to customers for the products they transport through the networks of Enbridge. As the contracts have minimum-volume requirements, Enbridge enjoys reliable cash flows even under adverse business conditions, when its customers transport low volumes.
The merits of the business model of Enbridge were on full display last year. The coronavirus crisis caused one of the fiercest downturns in the history of the energy market. The price of oil went into deep negative territory for the first time in history. Given also the collapse in the demand for oil products, it is only natural that most oil companies incurred excessive losses last year.
On the contrary, Enbridge was one of the extremely few oil and gas companies that grew their distributable cash flow per share. It grew its bottom line by 2% last year and is on track to grow its bottom line by another 1%-7% this year, primarily thanks to the contribution of new growth projects.
Enbridge is currently offering a 6.9% dividend yield. The company has a healthy payout ratio of 69% and is likely to continue growing its distributable cash flow thanks to its promising pipeline of growth projects.
On the date of publication, Bob Ciura was long ABBV. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.