2023-06-29 18:00:00 ET
Summary
- From my point of view, high dividend yield companies are attractive for any investment portfolio.
- A company that pays you a relatively high Dividend Yield can serve as an extra source of income and can protect you from the impact of stock market price fluctuations.
- I will present you with three companies that have an attractive Dividend Yield, a relatively low Valuation, strong Financials, and the potential to provide your portfolio with Dividend Growth.
Investment Thesis
There are many reasons why I believe it is attractive for investors to invest in companies that provide them with a relatively high Dividend Yield. Firstly, a high Dividend Yield can serve as additional income for investors, supplementary to the regular salary they receive. Secondly, through investing in companies that offer Dividend Growth as well as a relatively high Dividend Yield, investors can increase their additional income year over year. Thirdly, investors can become less affected by stock market price fluctuations. Fourthly, dividend payments can serve as an additional form of income once you retire. Finally, you can reinvest the dividend and benefit from the compound interest effect.
For today’s article, I have selected three high dividend yield companies for you that I currently consider attractive. The three companies needed to fulfil the following requirements in order to be part of a pre-selection:
- Market Capitalization > $5B
- Dividend Yield [FWD] > 4%
- P/E [FWD] Ratio < 30
- Dividend Growth Rate [CAGR] over the past 5 years > 2%
From this pre-selection, I chose the following three companies:
Philip Morris International
Philip Morris is a tobacco company that offers a portfolio of cigarettes and smoke-free products. The company has 79,800 employees and currently has a Market Capitalization of $149.48B.
I believe that the company possesses strong competitive advantages that enable it to build an economic moat over competitors. Among its competitive advantages are its product portfolio consisting of strong brands (the company sells over 130 brands, including Marlboro which is the world’s best-selling international cigarette ), the company’s global presence, and its extensive distribution network. The fact that the Tobacco Industry has strong advertising regulations helps Philip Morris build an economic moat over competitors since it prevents other companies from entering the sector.
Philip Morris currently pays its shareholders a Dividend Yield [FWD] of 5.28%. The company’s Dividend Growth Rate [CAGR] over the past 5 years stands at 3.15%, indicating that it can also help provide your portfolio with Dividend Growth.
However, it should be highlighted that the company’s Payout Ratio currently remains relatively high (87.54%). I interpret this number in a way that the company’s Dividend is not entirely secure. Therefore, I suggest underweighting the company in your investment portfolio in case you plan to include it. I suggest giving Philip Morris a maximum of 3% of your total investment portfolio in order to decrease its risk level and therefore enhance the chances of obtaining an attractive long-term Total Return.
Below you can find Consensus Dividend Estimates for Philip Morris. For 2023, the Consensus Yield stands at 5.36%, 2024 at 5.57%, and 2025 at 5.86%.
In the graphic below, you can find a projection of Philip Morris’ Dividend and Yield on Cost when assuming that the company would increase its dividend by 2.5% per year over the next 30 years (the assumption is based on the company’s Dividend Growth Rate [CAGR] of 2.77% over the past 3 years). The graphic indicates that you could potentially reach a Yield on Cost of 6.75% in 2033, 8.64% in 2043, and 11.07% in 2053.
When it comes to Valuation, it can be stated that Philip Morris’ current P/E [FWD] Ratio of 15.72 stands 2.50% below its Average over the past 5 years (16.12). However, the company’s current P/E [FWD] Ratio stands significantly above that of Altria (NYSE: MO ) (P/E [FWD] Ratio of 9.18). Therefore, I believe that Altria is the more attractive pick when it comes to Valuation, at this moment of writing.
I further believe that Altria is the slightly more appealing pick for investors in terms of Dividend Growth. The reason for that is Altria’s higher Dividend Growth Rate [CAGR] of 6.69% over the past 5 years when compared to Philip Morris’ Dividend Growth Rate [CAGR] of 3.15%. Furthermore, Altria has the slightly lower Payout Ratio (75.92% compared to Philip Morris’ Payout Ratio of 87.54%). Therefore, I further believe that Altria is the slightly better pick for investors when it comes to Growth.
Compared to Philip Morris, I think that an investment in Altria comes with slightly lower risk for investors: the reason for that is Altria’s lower 24M Beta Factor (0.38) compared to Philip Morris’ 24M Beta Factor of 0.62, Altria’s higher EBIT Margin (59.70% compared to 37.13%), its lower Payout Ratio (75.92% compared to 87.94%), and its lower Valuation (P/E [FWD] Ratio of 9.18 compared to 15.72).
Despite this, I still believe that Philip Morris is an attractive pick to be added to an investment portfolio when limiting its proportion to 3% on the overall portfolio in order to decrease the portfolio’s risk level.
Citigroup
Citigroup provides financial products and services and operates through the following segments:
- Institutional Clients Group
- Personal Banking and Wealth Management
- Legacy Franchises
The bank was founded in 1812 and currently has 240,000 employees. Citigroup possesses strong competitive advantages such as its global presence, diversified business model, and strong risk management.
At this moment in time, the bank pays its shareholders a Dividend Yield [FWD] of 4.43%. In addition to that, it is worth mentioning that the bank has shown a Dividend Growth Rate [CAGR] of 9.77% over the past 5 years. These numbers make me believe that the U.S. bank will not only provide your investment portfolio with Dividend Income but also with Dividend Growth, which is an ideal combination for helping you generate extra income in the next years while increasing this amount annually. It is also worth highlighting that the bank’s Payout Ratio stands at a relatively low level (28.02%), raising my confidence that the dividend should be relatively safe.
Below you can see the Consensus Dividend Estimates for Citigroup. The Consensus Yield stands at 4.50% for 2023, 4.65% for 2024, and 5.02% for 2025. These numbers serve as additional indicators that the bank is attractive to investors that want to generate extra income in the form of dividends.
The graphic below shows a projection of Citigroup’s Dividend and Yield on Cost when assuming an Average Dividend Growth Rate [CAGR] of 3% for the next 30 years. You could reach a Yield on Cost of 5.96% in 2033, 8.01% in 2043, and 10.76% in 2053.
In terms of Valuation, it is worth noting that the bank’s current P/E [FWD] Ratio of 7.54 stands below its Average over the past 5 years (9.18), indicating that the U.S. bank is currently undervalued.
It can also be highlighted that Citigroup’s P/E [FWD] Ratio of 7.54 stands below the one of competitors such as JPMorgan (NYSE: JPM ) (P/E [FWD] Ratio of 9.58) and Bank of America (NYSE: BAC ) (8.17), which serves as an additional indicator that the bank is currently undervalued.
Citigroup’s Dividend Yield [FWD] of 4.43% stands above the one of JPMorgan (2.88%) and above the one of Bank of America (3.17%), indicating that Citigroup is the most appealing fit for dividend income investors.
However, I see both JPMorgan and Bank of America ahead of Citigroup when it comes to Dividend Growth. The reason for that is that Citigroup’s Dividend Growth Rate [CAGR] of 9.77% over the past 5 years, stands below the one of JPMorgan (Dividend Growth Rate [CAGR] of 12.91% over the past 5 years) and below the one of Bank of America (12.89%). These numbers strengthen my belief that both JPMorgan and Bank of America are the more attractive fits for investors seeking Dividend Growth.
I further believe that the risk factors for Citigroup investors are slightly higher than for JPMorgan and Bank of America investors. The reason for that is Citigroup’s higher 60M Beta Factor of 1.57, while JPMorgan’s stands at 0.98 and Bank of America’s at 1.06.
These numbers also contribute to my opinion that you should give both JPMorgan and Bank of America a higher percentage of your overall investment portfolio than Citigroup. I suggest limiting the Citigroup position to a maximum of 3% of your overall investment portfolio in order to decrease the risk level and therefore increase the probability of obtaining an attractive Total Return when investing over the long term.
Verizon
Verizon currently pays its shareholders a Dividend Yield [FWD] of 7.35%. This number indicates that the company can be an excellent fit for those types of investors that look for Dividend Income to generate extra money alongside their salary.
Verizon has shown 18 years of Dividend Growth, which makes me believe that it should be able to continue providing your portfolio with Dividend Growth. The company’s Dividend Growth Rate [CAGR] over the past 3 years stands at 2%, which further indicates that the company should be able to increase its dividend in the years ahead. This is also proven when looking at the company’s Payout Ratio of 51.74%. This relatively low Payout Ratio can be interpreted as another signal that the company should be able to raise its dividend in the years to come.
Having a look at Verizon’s current P/E [FWD] Ratio of 7.73, it can be highlighted that it is 30.33% below its Average over the past 5 years (which is 11.09), demonstrating that Verizon is undervalued. In addition to that, it is worth mentioning that the company’s P/E [FWD] Ratio of 7.73 stands 57.31% below the Sector Median, serving as another indicator that the company is currently undervalued.
However, it is important to have in mind that AT&T’s (NYSE: T ) P/E [FWD] Ratio of 6.68 is even lower than Verizon’s, indicating that AT&T is the even better pick for investors when it comes to Valuation.
Nevertheless, I see Verizon in front of AT&T when it comes to Growth (Verizon’s Revenue Growth Rate [FWD] stands at 0.93% while AT&T’s is -9.91%) and in terms of Profitability (Verizon’s Return on Equity is 24.59% while AT&T’s is -5.13%).
In addition to that, I believe that an investment in Verizon comes with less risk factors than an investment in AT&T. My thesis is based on the fact that Verizon’s 60M Beta Factor is 0.34 while AT&T’s is 0.77.
Risk Factors
Each of the selected picks that I describe in this article comes attached to other risk factors.
I particularly see the limited growth perspective for Verizon as a risk factor for investors. This limited growth perspective could result in a Dividend cut one day in the future. However, I do not expect this to happen soon. This is particularly the case because the company’s Payout Ratio lies at 51.74%, indicating that there is enough room for future Dividend enhancements.
One of the biggest risk factors that I see for Philip Morris investors is that the company could cut its Dividend in the future, which could have a significant effect on the company’s stock price (Philip Morris’ Payout Ratio currently stands at 87.54%). In order to decrease the risk level of your portfolio I therefore suggest limiting the proportion of Philip Morris to 3% of your overall investment portfolio.
One of the main risk factors I see for Citigroup investors is macroeconomic risk factors: a recession could have a significant impact on the bank’s performance. However, for long-term investors, I see these risk factors as less significant.
Therefore, I suggest investing over the long term and benefiting from the steadily increasing dividend payments of the bank instead of speculating over the short term. I further suggest limiting the Citigroup position to a maximum of 3% of your overall investment portfolio, helping you to decrease the downside risk.
Conclusion
Including high dividend yield companies in your investment portfolio brings you different benefits. The three selections that I am presenting in this article can help you in different ways. Firstly, they can help you raise the Average Dividend Yield of your investment portfolio. Secondly, they can provide your investment portfolio with Dividend Growth. Thirdly, they can help you to become less affected by the stock market’s price fluctuations. Finally, they can help you decrease the risk level of your investment portfolio (all of them have a 24M Beta Factor below 1).
I believe that each of these selections are attractive in terms of Valuation, and I consider these picks to be attractive in terms of Profitability.
Implementing an investment strategy that combines dividend income and dividend growth brings you the enormous benefits of being able to increase your additional income from year to year in order to become more and more independent from the price fluctuations of the stock market. In my investment articles, I aim to help you reach this target.
Author’s Note: I would appreciate hearing your opinion on my selection of high dividend yield companies. Do you already own or plan to acquire any of the picks? Which are currently your favorite high dividend yield companies that combine Dividend Income with Dividend Growth?
For further details see:
3 High Dividend Yield Companies To Generate Extra Income For You