We love big dividend stocks as held by Schwab U.S. Dividend Equity ETF™ (SCHD) because, in addition to providing us with lucrative passive income that could potentially set us up for a retirement that has largely mitigated the sequence of returns risk that normally plagues stock market investors, the more stable cash-flowing, lower-growth aspects of stocks that pay out a high percentage of their earnings and dividends make them much easier to value. When coupled with our opportunistic capital recycling strategy, this enables us to achieve meaningful long-term outperformance in the market.
That said, not all stocks with big dividend yields are worth buying, and several are consistently overrated. As we discussed previously, some of these overrated high-yield stocks include AT&T (T) and 3M Company (MMM). In today's article, we will discuss two more very overrated big dividend stocks and two that, we think, are very underrated and attractive investments right now.
Overrated Big Dividend Stock #1: Verizon Communications Inc. (VZ)
The first big dividend stock that looks quite overrated to us is Verizon. While it is often loved by investors for its 6.6% dividend yield that is well covered by cash flows, it is suffering from slow growth, with 0.3% year-over-year revenue growth reported in Q1. Analysts predict the company will only grow revenues at a meager 1.5% CAGR, EBITDA at 1.8% CAGR, earnings per share at 1.4% CAGR, and dividends at an even slower CAGR of 1.1% through 2028. As a result, while its dividend yield of 6.6% is nice, it is not enough to generate attractive total returns when combined with its anemic growth rate.
Additionally, Verizon is weighed down with heavy debt, which is forcing management to focus on using its excess free cash flow to pay down debt in the coming years instead of accelerating its dividend growth. This is a similar issue plaguing its close competitor, AT&T Inc. (T). The very competitive and capital-intensive nature of its industry also generates infamously low returns on investment capital, making it a poor long-term compounder.
As a result, investors in Verizon can expect and enjoy a nice dividend, but they should expect the purchasing power of that dividend to erode over time due to inflation and should be content with mediocre to even subpar total returns. This is also evidenced by the fact that Verizon's EV/EBITDA of 7.21 times is roughly in line with its 10-year average of 7.17 times, despite interest rates rising meaningfully recently and Verizon's growth rate slowing to a crawl.
Overrated Big Dividend Stock #2: Altria Group, Inc. (MO)
The next very overrated big dividend stock we're going to discuss is a Dividend King: Altria. The reason we think Altria is very overrated is simply because, while its 8.4% dividend yield is quite attractive, its payout ratio is now at 80%, which means that it is not heavily covered, especially when you consider the fact that Altria is having to invest aggressively to try to diversify its business away from its core smokable products business that is rapidly declining to try to reignite the growth engine. The severity of the decline in the smokable products business was highlighted in its Q1 results, where its flagship Marlboro brand declined by 8.7% year-over-year in terms of volumes, and its discount products declined by a whopping 30.3%.
Overall, its total cigarette sales declined by 10% year-over-year, while its cigar sales declined by 6.1%, and total smokable products declined by 9.9% year-over-year. This was an acceleration from already bleak results in Q4, which saw Marlboro decline by 6.4%, discount decline by 26.1%, total cigarettes decline by 7.6%, total cigars decline by 1.4%, and total smokable products decline by 7.5%. As a result, not only is the decline severe, but it is accelerating across all of its product lines.
Meanwhile, the company has had several disastrous efforts to allocate capital elsewhere to drive bottom-line growth. These include buybacks that proved to be fairly unaccretive, as well as billions of dollars spent on a Juul investment that ended up resulting in massive write-downs for the company. While it is currently propping up its earnings per share growth and, by extension, dividend per share growth by buying back stock and hiking the prices on its cigarettes aggressively as volumes continue to shrink, these price hikes could eventually reach an expiration date, especially given that its primary audience is the older generation that is gradually shrinking in number.
Ultimately, we do not see much of a future for the company unless it can successfully diversify outside its smokable products in a major way. Moreover, it has a fairly high debt burden still from its aggressive investments in buybacks and Juul and other growth ventures that it will need to continue to pay down as well, especially if its smokable products volume declines begin to accelerate. As a result, we do not see much more in terms of total returns than the 8.4% dividend yield, and in fact, we could see total returns move lower than that if volume declines continue to accelerate and lead to a valuation multiple contraction.
Underrated Big Dividend Stock #1: Enterprise Products Partners L.P. (EPD)
That being said, there are two very high-quality big dividend stocks that we think the market has significantly underappreciated recently. The first one is Enterprise Products Partners. The degree to which it has been underappreciated by Mr. Market is evidenced in the chart below:
Over the past decade, Enterprise Products Partners has only increased its units outstanding count by 15.63%, yet, over that period, it has increased its EBITDA by 86.46%, reflecting significant per-unit EBITDA growth. Additionally, its distribution per unit has grown by 43.06% over the past 10 years, including a marked acceleration in its distribution growth rate over the past several years. Meanwhile, its unit price has actually declined by 24.64% over that span.
This also does not consider that its leverage ratio has dropped meaningfully over that period, and its credit rating has been upgraded to A-, which is the best in the sector. The 7.6% forward distribution yield, fortress balance sheet, and solid distribution growth outlook (expected to be in the mid-single digits for years to come) along with the potential for meaningful buybacks and special distributions once its current growth projects come online in a few years, which would bring its leverage ratio down significantly below its already low target level, offer exceptional risk-reward for investors and appear to be significantly underrated by the market right now.
Underrated Big Dividend Stock #2: Brookfield Infrastructure Partners L.P. (BIP, BIPC)
The second underrated big dividend stock is Brookfield Infrastructure Partners L.P. and its companion, Brookfield Infrastructure Corporation (BIPC). Its underappreciated state of affairs is also depicted in the chart below.
Over the past three years alone, its price declined by 21.17% even as its distribution increased by 19.12%. Moreover, between 2021 and 2023, it posted over 12% adjusted funds from operations per unit CAGR, reflecting strong growth, while also increasing its diversification across multiple sectors, including great exposure to the transportation and data sectors.
In particular, it is investing aggressively into its data business, which is projected to deliver extremely high returns and grow rapidly from the AI boom, even if it is less accretive to cash flow growth on a near-term basis. As a result, its cash flow growth and future distribution growth potential are likely being materially understated, and we think the market is overlooking this. Moreover, it offers an attractive 5.67% forward distribution yield compared to its historical average of about 4.4%.
Its balance sheet is also in strong shape with few near-term maturities and significant liquidity, as well as a BBB+ credit rating. It continues to generate strong growth while also hiking its distribution at a mid to high-single digits CAGR. As a result, we think now is a very opportune time to buy it.
Investor Takeaway
As we discussed in this article, high-yield stocks are powerful vehicles for funding both retirements and driving attractive long-term total returns if combined with an opportunistic capital recycling strategy. However, investors need to be careful because some high-yield stocks are considerably overrated by investors. Instead, they should focus on the ones that are most likely to deliver attractive risk-adjusted total returns, especially those that are overlooked at the moment. We think that EPD and BIP are among the most attractive high-yield opportunities today, and we are buying these stocks aggressively as a result.
If you want access to our Portfolio that has crushed the market since inception and all our current Top Picks, join us for a 2-week free trial at High Yield Investor.
We are the fastest-growing high yield-seeking investment service on Seeking Alpha with over 1,700 members on board and a perfect 5/5 rating from 166 reviews.
Our members are profiting from our high-yielding strategies, and you won't be charged a penny during the free trial, so you have nothing to lose and everything to gain.
Start Your 2-Week Free Trial Today!