Meet 4 S&P 500 Dividend Stocks That Yield at least 6%. Here are my Strongest Bulk Buys for July.

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Meet 4 S&P 500 Dividend Stocks That Yield at least 6%. Here are my Strongest Bulk Buys for July.

Four stocks in S&P 500 pay more than 6% in dividends — except for a couple real estate investment trusts (REITs), which are required by state law to pay a large portion of their income in dividends to get a certain tax break.

A dividend yield of 6% is very high, but it is not always as good as it may seem. It can be a trap, because a percentage of the share price goes to assets. So if the stock tanks, the yield goes up if the dividend is cut — and that can create a perpetual dividend payment.

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Let’s examine four S&P 500 stocks with yields above 6%. Of Verizon Communications (NYSE: VZ), General Mills (NYSE: GIS), Pfizer (NYSE: PFE), and Kraft Heinz (NASDAQ: KHC), which of the four is the most bought and has the most sustainable share?

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Looking at key metrics

When evaluating a dividend stock, there are a few metrics to consider, starting with yield. All four of these stocks have yields above 6%, so they are all very productive. Here’s the breakdown — and you’ll see, Pfizer has a great product.

Now let’s look at the payout ratio, which is the percentage of income that goes to assets. A high payout ratio of 60% to 70% or more can mean that a company is paying too much to support its dividends, diverting funds from growth investments or leading to a dividend cut. Here are the payout ratios — and Pfizer was once again the winner for the lowest payout ratio of the group.

Verizon: 57.6% payout ratio.
General Mills: payout ratio of 68.7%.
Pfizer: 56.2% payout ratio
Kraft Heinz: payout ratio of 62.7%.

Another thing to consider is how long the company has been increasing its dividend. This shows a long-term commitment and financial strength to support the dividend. Here’s how many years in a row it’s increased its profits — and Verizon ranks first this time around.

Verizon: 21 years in a row
Common grinders: 6 years in a row
Pfizer: 15 years in a row
Kraft Heinz: 0 consecutive years

Verizon is a great choice

These aren’t the only metrics investors should consider, but they go a long way in showing how sustainable a high dividend payout is. Based on these numbers, Pfizer and Verizon appear to be the top two in this group, with Pfizer experiencing the narrowest margin in terms of yield and payout ratio and Verizon showing strong long-term earnings growth.

It is also important to look at the returns of each of these stocks, because they show that the high yield is mainly due to the decline in the stock price. Year to date (YTD), General Mills stock is down nearly 20%, while Pfizer is down 2%. Kraft Heinz is up 4% YTD, while Verizon is up 2%. On a total return basis, with earnings reinvested, Kraft Heinz and Verizon lead the way, up 6% YTD.

But in the long run, only Verizon has better returns. Over the past three years, Verizon has had an average annual return of 4% and 11% on reinvested dividends. Over the past five years, Verizon has averaged a negative 6% return, but on a total return basis, it has an annual return of 0.4%. Over the past 10 years, it has delivered a 2% annualized return. Pfizer also has a 10 year annual dividend of 1%, but others do not.

Based on all of these factors, Verizon looks like the clear choice as the best dividend yielding over 6%. Analysts generally agree: 41% rate the stock a buy, with an average price target of $50.50 per share — representing a 22% upside.

Should you buy stock in Verizon Communications right now?

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Dave Kovaleski has no position in any of the specified stocks. The Motley Fool has positions and recommends Pfizer. The Motley Fool recommends Kraft Heinz and Verizon Communications. The Motley Fool has disclosure policy.

Meet 4 S&P 500 Dividend Stocks That Yield at least 6%. Here are my Strongest Bulk Buys for July. was first published by The Motley Fool