It’s generally wise to tread cautiously in purchasing stocks with high dividend yields.
That’s because the high yield may stem from a low share price, and the low share price might stem from fundamental problems for the company. Remember that the yield equals the annual payout divided by the share price.
David Harrell, editor of Morningstar’s DividendInvestor newsletter, offered an analysis Wednesday of the dividend prospects for four high-dividend stocks that Morningstar analysts peg as undervalued.
Altria, The Tobacco Company
(MO)
Morningstar moat (durable competitive advantage) rating: wide. Morningstar fair value estimate: $52. Thursday’s closing stock price: $45.67. Forward dividend yield: 8.2%.
“Morningstar analysts expect cigarette volumes to decline by about 5% a year moving forward,” Harrell said. “However, they also believe that Altria has a product where customers are addicted to it. They believe Altria should be able to raise its prices in excess of that decline.
“So that would allow the firm to continue to increase its revenue, increase its earnings, and therefore be able to keep the dividend and actually increase it over time.”
Verizon Communications
(VZ)
Moat rating: wide. Fair value estimate: $57. Thursday’s closing stock price: $37.60. Forward dividend yield: 6.9%.
“Verizon raised its dividend last year by 2%, and now it can point to 16 consecutive years of dividend increases, which is a great thing,” Harrell said.
“However, those increases have generally been pretty small, and Verizon’s five-year annualized dividend-growth rate is only 2.1%.”
The reason for that is Verizon has a major debt load to work off. “Morningstar analysts believe that’s going to keep them from being able to return much cash to shareholders over the next couple of years,” Harrell said. “We’re probably not going to see a lot of near-term dividend growth.”
Truist Financial, a Large Regional Bank
(TFC)
Moat rating: narrow. Fair value estimate: $57. Thursday’s closing stock price: $26.83. Forward dividend yield: 7.5%.
“We’ve seen a pretty big drop in Truist’s share price since March [amid the banking crisis], and that share-price drop has pushed the yield above 6%,” Harrell said.
“There’s some earnings pressure there that the bank is going to have to work through, and that could possibly hinder near-term dividend growth.
“But one thing in favor of Truist is that it has expressed a lot of support for the dividend in the past. … And in the most recent earnings call, the CEO again reiterated the firm’s commitment to the dividend.”
Lloyds Banking Group
(LYG)
Moat rating: narrow. Fair value estimate: $3.80. Thursday’s closing stock price: $2.25. Forward dividend yield: 5%.
“It looks like the bank is going to be able to pay out about 11 cents per ADR share, after fees, to U.S. investors, and that translates into a yield of around 4.6%,” Harrell said.
“That’s certainly more of a yield than you’re going to get from any of the big four U.S. banks” -- Bank of America (BAC), Citigroup (C), JPMorgan Chase JPM, and Wells Fargo (WFC). Furthermore, “Lloyds is very well capitalized,” Harrell said.
Meanwhile, management is supportive of dividend growth, he said. But the CEO said last year that institutional shareholders expressed a strong preference for share buybacks over dividends.
The author of this story owns shares of Verizon and JPMorgan Chase.
