A high dividend yield is either a gift or a warning, and the number itself will not tell you which. Yield is just the payout divided by the share price, so it can go up for two very different reasons: either because a company keeps raising the dividend or because investors keep selling the stock. The first kind of yield is earned. The second kind is a value trap wearing a nice suit.
The way to tell them apart is to look past the percentage at what the company is doing. Is it growing earnings faster than the dividend, launching products, winning customers? Or is it holding the payout flat and hoping nobody notices the business shrinking underneath it? Three consumer companies below pass that test. Two do not.
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Buy: PepsiCo, 4.4% and a 54-year streak
PepsiCo (NASDAQ: PEP) yields about 4.4% at a share price near $141, the highest it has been in years, and it has raised its dividend for 54 consecutive years. This 50+ year increase makes this company a Dividend King. The payout is $1.48 a quarter, up 4% this year. What makes the yield earned rather than suspicious is what the company did in October: It renewed its beverage deal with Taco Bell for another 11 years, days after losing KFC’s fountains to Coca-Cola (NYSE: KO), which told you how hard PepsiCo will fight for the accounts it still has. Third-quarter revenue grew 5.6% to $25.3 billion, and management said it will take “additional structural cost reduction actions” to fund growth.
Buy: Best Buy, nearly 4% from a retailer that is growing again
Best Buy (NYSE: BBY) pays $0.96 a quarter, has raised the dividend for 21 straight years, and yields close to 4%. The reason to own this company now is that the business turned a corner this summer. Q2 comparable sales rose 4.1% against a company forecast of about 1%, and Best Buy raised its full-year sales and earnings outlook. Newer categories like AI-powered glasses and trading cards more than doubled, per Bloomberg. In October, the company launched Best Buy Gamers, a dedicated gaming hub, ahead of a holiday season with Grand Theft Auto VI on the calendar.
Buy: Philip Morris, a smaller yield that keeps climbing
Philip Morris International (NYSE: PM) yields about 3.2%, lower than the other two, but it just raised the dividend 8.8% to $1.60 a quarter, its 17th straight annual increase. That raise is funded by a company that reported record quarterly revenue, gross profit, and operating income in October. The smoke-free business, built on IQOS heated tobacco and ZYN nicotine pouches, now accounts for more than 40% of revenue, and operating income grew 14%. The payout ratio is high at around 90% of reported earnings, which would be a worry if profits were flat. They are not: Operating income grew 14% last quarter and adjusted earnings rose 5%.
