Should You Buy the 3 Highest-Paying Dividend Stocks in the S&P 500?


When researching potential stock buys, dividend investors often look first at a stock’s dividend yield. It’s understandable, but it should only be the starting point on the investing journey. Investors also need to dig into the details to understand the full story behind an investment before they buy it.

That’s extra important when looking at the highest-yielding stocks in the S&P 500 index. Case in point, there are very good reasons dividend investors might want to avoid three S&P 500 stocks — Altria (NYSE: MO), Pioneer Natural Resources (NYSE: PXD), and Devon Energy (NYSE: DVN) — despite their big dividend yields.

Here’s what you need to know about these three high-yielding dividend stocks.

1. Altria’s business is crumbling

Altria has a gigantic 9.6% dividend yield. And the dividend has increased annually for many years. Taking a cursory look, there’s a lot to like about this consumer-staples company. The problem arises when you dig into the numbers a bit more. That’s where you’ll see that Altria’s most important business, at nearly 90% of revenue, is in long-term decline.

A line of caution police tape.

Image source: Getty Images.

Notably, over the past 10 years or so, the volume of cigarettes Altria sells has fallen by 40%. That’s a business trend that should worry investors, though the company has managed to offset those declines with price increases. It seems highly unlikely that Altria will be able to keep raising prices forever. At some point, it will have bled this cash cow dry, and then the dividend won’t be supportable anymore. The high yield is a warning that Mr. Market thinks the dividend is increasingly at risk.

2. Pioneer Natural Resources has two strikes against it

Pioneer Natural Resources has a very high yield, currently at 6.3% if you annualize the most recent dividend payment. But if you add up the past four dividend payments, the yield would be drastically different. That statement should strike dividend investors as odd. The reason for the discrepancy is that Pioneer has a variable dividend policy, which means the yield isn’t really a reliable indicator of the income you can expect to collect.

For reference, the dividend is tied to the company’s business performance. As an oil and natural gas producer, Pioneer’s top and bottom lines are just as volatile as energy prices. While a variable dividend policy is a way to reward investors when oil prices are high, it is not going to provide income stability.

There’s another wrinkle here. Pioneer has agreed to be bought by energy giant ExxonMobil (NYSE: XOM). There was a premium offered, so the stock probably has more downside risk than upside potential right now. Indeed, if the deal falls through, the stock would probably fall as that premium went away.

3. Devon Energy’s dividend is variable, too

Devon is a peer of Pioneer, with both operating in the U.S. onshore energy space. Devon is not currently involved in a merger or acquisition, but it does have a variable dividend policy. So, like Pioneer, the high yield here can’t exactly be counted on. The yield, annualizing the most recent payment, is nearly 7% at the moment.

However, some numbers will help explain the problem the company’s variable dividend poses for dividend investors. In the third quarter of 2022, Devon’s dividend hit a high point of $1.55 per share. Then it started to trend lower, along with oil prices. By the third quarter of 2023, it had fallen to just $0.49 per share. That said, oil prices perked up a bit after that, leading to a fourth-quarter 2023 payment of $0.77 per share. This is not a reliable income stream.

For more active investors, Devon could serve as a hedge against real-world energy costs. Just as costs for heating your home and filling your car up are likely to be rising, so, too, will Devon’s dividend. But you have to be ready for the other side of the equation, when oil prices fall and take Devon’s dividend along for the ride. Most dividend investors probably won’t want to buy into that.

Know what you own

Dividend investors love high-yield stocks, but not all high-yield stocks are worth owning. And very often the stocks with the highest yields are the most problematic investments. Altria’s declining business is one that most investors should stay away from. Devon and Pioneer both have variable dividends, which only a small group of investors will probably appreciate. And Pioneer specifically has an acquisition agreement in place that probably creates more risk than opportunity at this point. None of these high-yield S&P 500 dividend stocks is really all that attractive right now if you’re trying to live off the income your portfolio generates.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Pioneer Natural Resources. The Motley Fool has a disclosure policy.

Should You Buy the 3 Highest-Paying Dividend Stocks in the S&P 500? was originally published by The Motley Fool

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