Four stocks on the S&P 500 pay out dividends of more than 6% — not including a couple that are real estate investment trusts (REITs), which are required by federal statute to pay out most of their income in dividends in exchange for certain tax breaks.
A 6% dividend yield is extremely high, but it is not always as good as it may appear on the surface. It may be a trap, because it’s the percentage of the share price that goes to dividends. So when a stock tanks, the yield goes up if the dividend is not cut — and that can create an unsustainable dividend payout.
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Let’s examine the four S&P 500 stocks with yields of more than 6%. Of Verizon Communications (NYSE: VZ), General Mills (NYSE: GIS), Pfizer (NYSE: PFE), and Kraft Heinz (NASDAQ: KHC), which of the four is the best buy and has the most sustainable dividend?
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A look at the key metrics
When examining dividend stocks, there are several metrics to consider, starting with yield. All four of these stocks have yields that are over 6%, so they are all high-yielding. Here’s a breakdown — and you’ll see, Pfizer has the best yield.
Now let’s look at the payout ratio, which is the percentage of earnings that goes to dividends. A high payout ratio of 60% to 70% or more can mean the company is paying out too much to support its dividend, diverting funds from growth investments or leading to a dividend cut. Here are the payout ratios — and Pfizer is again the winner with the lowest payout ratio of the group.
Verizon: 57.6% payout ratio
General Mills: 68.7% payout ratio
Pfizer: 56.2% payout ratio
Kraft Heinz: 62.7% payout ratio
Another thing to consider is how long the company has been…
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