You can earn money from the stock market via capital gains and dividends. Typically, investors aim to buy stocks that offer a high dividend yield, which is not a good strategy. It’s crucial to consider other business factors, such as a company’s debt, payout ratio, and the potential for cash flow growth, among others.
I’ll discuss the three highest-paying dividend stocks part of the S&P 500 index to see if they are positioned to deliver outsized gains to shareholders in 2024 and beyond.
Altria Group stock
Valued at US$75 billion by market cap, Altria Group (NYSE:MO) stock has returned more than 100,000% to shareholders since 1990, easily outpacing the S&P 500. However, in the last 10 years, Altria Group has trailed the broader market by a wide margin, rising “just” 102% after adjusting for dividends. Comparatively, the S&P 500 index has more than tripled investor returns in this period.
The pullback has raised Altria’s dividend yield to more than 9%, given it pays shareholders an annual dividend of US$3.92 per share. It generates around $9 billion in free cash flow and pays dividends amounting to US$6.75 billion, indicating a payout ratio of 75%, which is sustainable.
Priced at 8.3 times trailing cash flow, Altria stock is quite cheap, as investors are concerned over the company’s shrinking sales due to lower tobacco use among the younger population.
Devon Energy stock
Devon Energy (NYSE:DVN) is an energy company valued at US$32 billion by market cap that offers shareholders a tasty dividend yield of 4.8%. However, investors should note that Devon pays shareholders a base dividend and a special dividend tied to its cash flows.
Devon Energy is an oil and gas producer, and the majority of its production is from the Delaware Basin. Amid a challenging macro environment and volatile oil prices, Devon Energy plans to invest in improving well productivity across its portfolio of quality assets, which should positively impact profit margins.
In the first quarter (Q1) of 2024, Devon Energy generated US$623 million in free cash flows and historically, the management has distributed 70% of free cash flow to shareholders. In Q1, it paid dividends worth US$224 million and deployed US$205 million towards share buybacks.
AT&T stock
The final S&P 500 dividend stock on my list is AT&T (NYSE:T), which pays shareholders an annual dividend of US$1.11 per share, indicating a yield of 6.5%. In Q1 of 2024, the telecom giant reported a free cash flow of US$3.1 billion and expects to end the year with cash flows between US$17 billion and US$18 billion.
Given that AT&T’s annual dividend distribution for 2024 stands at US$8 billion, a payout ratio of less than 50% will allow AT&T enough room to service its debt and strengthen its balance sheet.
While the telecom industry is quite mature, AT&T reported 349,000 net postpaid additions in Q1, while the postpaid churn dropped to a low of 0.72%. It ended Q1 with 71.6 million postpaid phone subscribers and an average revenue per user of US$55.57 per month, up 0.9% year over year.
