If you’re like a lot of other income-seeking investors, there’s a good chance you own a stake in dividend stocks like AT&T (T), Merck (MRK), and Phillip Morris (PM). They’re big, popular, and therefore easy to own.
Just because a stock is prolific, however, doesn’t mean it’s the best name in its sector if your goal is a strong dividend yield. There are other factors to consider, including consistency of payouts, history of dividend increases, and overall stock performance. After all, a 6% dividend yield doesn’t mean much if the stock price is falling more than that.
Here are three dividend stocks that could — and possibly should — replace the Phillip Morris, Merck, and AT&T you currently have parked in your portfolio:
Dump AT&T (T)…
Not only is it a Dow name, but right now AT&T (T) offers the highest dividend yield among all 30 Dow Jones Industrials stocks, paying 5.2%. It’s a steady dividend, too, with reliable increases in the payout over time. In fact, the payout has increased every year for the past 30 years. That’s the power of a recurring-revenue business model.
Still, if an income investor needs a telecom holding to round out a portfolio, there are better dividend stocks from the sector than AT&T.
… and Buy Windstream Holdings (WIN)
Windstream Holdings (WIN) may do less than 5% of the total business that AT&T does, but it’s certainly giving a bigger piece of its revenue back to shareholders. The current dividend yield for WIN stock is a whopping 10.4%. However, it has not steadily pumped up its payout over time the way AT&T has. In fact, the quarterly payout of 25 cents per share hasn’t budged since 2007. Those who know Windstream well will also know that earnings have been deteriorating since 2011, and were getting suspiciously close to a net loss as of last year.
So why should an income seeker see Windstream as one of only a few great high-yielding dividend stocks if it may not be able to pay its dividend much longer? Because the company could be at a turning point, judging from new bullish rating by research house Sanford. C. Bernstein along with a strong recovery effort from shares over the past four months.
Shed Philip Morris (PM)…
What could be better for consistent income than owning a company which drives revenue largely by starting and supporting an addiction? That’s cigarette maker Philip Morris (PM). The current yield of 4.2% makes it one of the market’s favorite dividend stocks.
Problem: While neither revenue nor earnings have budged since 2011’s peak levels, the payout ratio has continued to move incrementally higher. Part of the blame can be placed on the introduction of electronic cigarettes, and part of it is the result of smokers steering clear of premium cigarette brands selling at premium prices. Whatever the reasons, something will have to give soon, but given that Philip Morris will only be getting into the e-cigarette game later this year, the company is likely to have a tough time growing the bottom line well enough to maintain growth in its payout.
…and Scoop Up Vector Group (VGR)
Vector Group (VGR) also makes traditional tobacco cigarettes, and is also feeling the effects of smoking cessation in addition to the mainstreaming of electronic cigarettes. Fortunately for Vector Group, the company got into the e-cig race a bit earlier than Phillip Morris did by launching its Zoom brand of electronic cigarettes in January. Given how small Vector is though, e-cigs could prove to be a serious boon and push VGR stock back to the top of the list of high-potential dividend stocks.
And it’s not just electronic cigarettes that could put Vector Group back on a growth path. As noted above, consumers have been less and less willing to pay big bucks for premium brand cigarettes for nearly a decade, and instead are willing to try lesser-known and less expensive brands like Vector-made Pyramid.
In the meantime, VGR stock pays a solid dividend yield of 7.8%, qualifying it as one of the top dividend stocks within the tobacco industry.
Sell Merck (MRK)…
It’s arguably the most stable name in the pharmaceutical world, and with a dividend yield of 3.0% income seekers have pegged Merck (MRK) as one of the healthcare industry’s best dividend stocks. That dividend, however, may be in bigger jeopardy than most investors realize.
While Merck has been vocally optimistic about its drug pipeline, it’s unlikely that it will be able to fully offset revenue losses from a string of past and future patent expiries. In 2017, cholesterol-fighting drugs Zetia and Vytorin will see their patents expire, and much of the patent protection for Nasonex expired this year. That’s well more than $3 billion in annual sales at risk with those three drugs alone.
… and Invest in PDL Biopharma (PDLI)
Why not invest in a biopharama that was built from the ground up to reward shareholders with a steady stream of income? PDL Biopharma (PDLI) specifically buys rights to drugs that may not be terribly sexy, but are highly marketable. As proof of that marketability and business model, PDLI pays a dividend yield of 6.4%, making it one of the top dividend stocks within the healthcare sector.
Critics will be quick to point out that PDL Biopharma is in the midst of falling off its own patent cliff, with the last of its key patents set to expire at the end of this year. What’s been widely unappreciated to date, though, is that the company has been lining up new revenue-bearing products in the meantime, with some of those deals already generating cash flow.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.