5 Dividend Stocks With High Yields That Are Safer Than You Might Think

Pfizer (PFE +0.21%) has a huge 5.9% dividend yield, which is a clear sign that investors are worried about the dividend’s sustainability. That’s just one of a handful of companies where the same statement can be made across multiple industries. Here’s why the risk may not be as big as it seems with high-yielders Pfizer, Bristol Myers Squibb (BMY +1.78%), Realty Income (O -0.74%), W.P. Carey (WPC +1.12%), and Hormel Foods (HRL +1.19%).

Pfizer and Bristol Myers Squibb are dealing with issues

There’s no question that Pfizer and Bristol Myers Squibb are under pressure today. And there’s a good reason, as both of these pharmaceutical companies have patent expirations coming up. They are working on new drugs to offset the expected revenue decline, but sometimes innovation and patent expirations don’t align perfectly. This is why Pfizer’s yield is 5.9%, and Bristol Myers Squibb’s is 4%. The average drug stock yield is 1.3%.

In Pfizer’s case, dividend concerns are material because its payout ratio is well above 100%. However, dividends come from cash flow, not earnings. Comparing the drug giant’s dividend to cash, using the cash dividend payout ratio, offers some solace. That ratio is around 85%, which is high, but suggests the dividend remains supportable. Meanwhile, the company continues to state that the goal is to maintain and grow the dividend over the long term.

Bristol Myers Squibb’s payout ratio is a far more reasonable 55%, matching its cash dividend payout ratio. And for those worried about patent expirations, its “growth portfolio” already generates more revenue than its “legacy portfolio.” Patent expirations will be a headwind, but the drug maker is making clear progress toward offsetting the hit. And the truth is, patent expirations are a normal part of the business for drug makers, so neither of these high-yielders is facing an unusual problem.

Realty Income and W.P. Carey: Higher rates will bite, but markets will adjust

Realty Income and W.P. Carey are both high-yield net lease real estate investment trusts (REITs). Realty Income’s yield is 5.5%, while W.P. Carey’s is 5.8%. There are a couple of issues to consider here. First, REITs tend to have high yields, though the industry average is 3.6%, so these two REITs are still on the high side. Second, net leases are usually a financing transaction for the seller, who often becomes the lessee in sale/leasback deals.

Realty Income and W.P. Carey make the spread between their financing costs and the rents they collect. Right now, that spread is being squeezed by rising interest rates. And investors are rightly concerned about the impact this will have on these REITs. However, property markets have historically adjusted to rising rates in ways that ensure REITs can continue to make profitable investments (normally, asset prices fall).

Think about that for a second, and it makes complete sense. If buying a building wasn’t profitable, nobody would buy buildings. Meanwhile, builders and building owners face situations such as debt maturities that will necessitate raising new capital. That leaves them with little choice but to lower the property’s sale price. This isn’t a quick process, but history suggests that investors worried that rising rates will permanently impact net lease REITs like Realty Income and W.P. Carey are probably creating a buying opportunity for investors who think long term.

You have a friend at Hormel

Hormel Foods’ dividend yield is 5.3%, compared to an average of 2% for the consumer staples sector. The company has been facing issues that cost-cutting and a portfolio overhaul are meant to address. However, the moves the company has made have been slow to yield results. Investors are worried, but they probably shouldn’t be too concerned.

For starters, Hormel is a financially strong business, with a debt-to-equity ratio of roughly 0.4x. It covers its interest costs 11x over. And while its payout ratio is over 100%, its cash dividend payout ratio is around 80%. Meanwhile, the company is a Dividend King, with over 50 consecutive annual dividend increases. There’s a long history of supporting the dividend through good times and bad.

But there’s a deeper story. The Hormel Foundation controls roughly 47% of Hormel’s stock. It uses the dividends it collects to support its giving. It wants to see the company make long-term decisions that will lead to a reliable, growing dividend, just like other dividend investors. Given the size of its investment, Hormel has the leeway to make long-term decisions that may upset Wall Street in the short term. And thus, the involvement of The Hormel Foundation suggests that Hormel’s dividend is much safer than its lofty yield suggests.

You have to go in with your eyes open

When you step back, it looks like Pfizer, Bristol Myers Squibb, Realty Income, W.P. Carey, and Hormel have dividends that are safer than their elevated yields might indicate. However, you still need to understand that you are taking on risk by investing in each of these high-yield stocks. The real story is that their yields are high for a reason, but it looks likely that the dividends will survive the headwinds they face. If you think long-term and have a strong enough stomach, each one could be worth a deep dive today.