We recently compiled a list of the 10 Best Dividend Stocks with Over 9% Yield According to Analysts. In this article, we are going to take a look at where Walgreens Boots Alliance, Inc. (NASDAQ:WBA) stands against the other dividend stocks with over 9% yield.
The ongoing debate between dividend yields and dividend growth has left investors split on this strategy. Although high yields can be tempting, excessively high yields can be concerning from the start. Investors are often warned against yield traps, as extremely high yields can indicate potential financial issues within the company. Investors may require a higher return to offset the increased risk associated with the investment. According to analysts, the best dividend stocks aren’t necessarily those with the highest yields. They recommend that investors look beyond just the yield and focus on stocks with reliable dividends, purchasing these stocks when they are undervalued. Dan Lefkovitz, a strategist for Morningstar Indexes, made the following comment about extremely high yields in the firm’s recent report:
“It’s really critical to be selective when it comes to buying dividend-paying stocks and chasing yield. Looking for the most yield-rich areas of the market can often lead you into troubled areas and dividend traps—companies that have a nice-looking yield that is ultimately unsustainable. You have to screen for dividend durability and reliability going forward.”
Does this mean investors should steer clear of high yields? While the general consensus might lean towards this, the real answer depends on the company’s fundamentals. It’s important to note that high yields aren’t necessarily a negative indicator. In fact, dividend yield becomes quite significant when investing in dividend stocks. It is a key factor as it shows how much income an investor can expect to earn from dividends compared to the stock’s price. However, factors such as the company’s cash flow generation, payout ratio, and dividend growth also need to be taken into account to fully benefit from high yields. If these metrics are strong, then stocks with high yields can also be worth considering.
Read Also Best Dividend Growth Stocks to Buy and Hold Now and 10 Best Dividend Aristocrats with Over 3% Yield.
Some reports have highlighted the long-term benefits of high-yield stocks, noting that as dividend yields increase, returns tend to rise while risk decreases. Hartford Funds recently did detailed research on this by taking annualized standard deviation into account. Standard deviation measures the volatility of a portfolio’s total returns, with a higher standard deviation indicating greater historical volatility. According to the report, from December 1969 to March 2024, high-dividend portfolios delivered an annualized return of 12.3%, mid-dividend portfolios 10.5%, and low-dividend portfolios 9.7%. The annualized standard deviations for these portfolios were 14.1%, 16%, and 20.8%, respectively.
In addition, a company’s dividend payout ratio is a crucial indicator of its ability to adjust its dividend policy. Firms that either just cover their dividends or allocate most of their earnings to dividends might face risks from competitive pressures, as their cash flow may be inadequate for operational needs. Companies with high payout ratios could experience slower future growth which may impact both share price appreciation and dividend increases.
Nuveen examined the performance of companies with high payout ratios from December 2003 to December 2023. According to the report, stocks with the highest payout ratios have not been the strongest performers over the long term historically. Among companies that have paid dividends in the past 20 years, those with medium and medium-high payout ratios have generally outperformed. We also think these attributes make a strong case for including companies with robust balance sheets and solid fundamentals for future dividend investment in a portfolio.
Our Methodology:
For this list, we screened for dividend stocks with yields higher than 9% as of August 12. Then, we narrowed down the choices by finding stocks with the highest upside potential according to analysts. Among those stocks, we chose companies that have relatively stable dividend histories, however, a lot of the companies on the list don’t have a consistent record of paying dividends due to their exceptionally high yields. They either stopped or reduced their dividend payments in 2020 due to the pandemic or because they were facing financial difficulties. The stocks are ranked in ascending order of their upside potential, as of August 12.
We’ve also mentioned the hedge fund sentiment for each stock using Insider Monkey’s Q1 2024 database. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A pharmacist discussing the health benefits of a prescription medication with a customer.
Walgreens Boots Alliance, Inc. (NASDAQ:WBA)
Upside Potential as of August 12: 34.02%
Dividend Yield as of August 12: 9.80%
Walgreens Boots Alliance, Inc. (NASDAQ:WBA) is an American multinational retail holding company that owns and operates retail pharmacy chains and other pharmaceutical manufacturing and distribution companies. The company faced a major setback at the beginning of 2024 when it had to reduce its dividend, ending a 47-year streak of consistent growth. This decision was made to conserve cash for supporting growth initiatives and strengthening its balance sheet. As a result, the stock dropped to new lows of around $10.68 per share and has declined by more than 60% year-to-date.
Despite recent setbacks, Walgreens Boots Alliance, Inc. (NASDAQ:WBA) is working to recover its losses. The new CEO has announced plans to close several underperforming stores and reduce its focus on primary-care business ventures. In addition to these closures, the company aims to implement a US Retail Pharmacy action plan to improve customer and patient experiences across various channels. It will also streamline its US Healthcare portfolio and align its US pharmacy and healthcare operations to enhance market capabilities.
Ariel Investments also highlighted this in its Q1 2024 investor letter. Here is what the firm has to say about WBA:
“Alternatively, several positions weighed on performance. Shares of retail drugstore operator, Walgreens Boots Alliance, Inc. (NASDAQ:WBA), declined over the period as challenging consumer and macroeconomic conditions, ongoing operational issues and a significant cut in the dividend weighed on shares. To address these performance lows, WBA’s new CEO is rebuilding the company’s management team with leaders who have significant experience in healthcare services. Meanwhile, WBA continues to execute on its cost savings initiatives to optimize profitability and is using excess capital to prioritize the sustainability of its operations and balance sheet. Over the medium-term, we expect a re-rating in shares as the new executive team earns credibility, margins and free cash flow show signs of improvement and the company deleverages. WBA shares are currently trading at a significant discount to our estimate of private market value.”
The key question is whether these strategies are benefiting Walgreens Boots Alliance, Inc. (NASDAQ:WBA). The fiscal Q3 2024 earnings report showed that the company is dealing with a tough operating environment, with ongoing pressures on U.S. consumers and recent market dynamics negatively impacting pharmacy margins. However, the company reported revenues of $35.4 billion, a 2.6% increase from the previous year and better than expected. Its cash position was also strong, with $605 million in operating cash flow and $334 million in free cash flow, reflecting an increase of $778 million from the previous year. Despite these positive aspects, the negatives outweigh the positives, leading the company to lower its guidance for the second time this year, which has raised concerns among investors.
That said, there are hopeful signs with the new CEO and the implemented measures, even though they may take time to show results. Moreover, the company’s cash flow indicates a promising outlook for dividends, which could be further supported by cost-cutting efforts. Walgreens Boots Alliance, Inc. (NASDAQ:WBA) currently offers a quarterly dividend of $0.25 per share and has a dividend yield of 9.80%, as of August 12.
As of the close of Q1 2024, 41 hedge funds in Insider Monkey’s database held stakes in Walgreens Boots Alliance, Inc. (NASDAQ:WBA), growing from 31 in the previous quarter. The total value of these stakes is over $715 million.
Overall WBA ranks 4th on our list of the best dividend stocks with over 9% yield. While we acknowledge the potential of WBA as an investment, our conviction lies in the belief that some deeply undervalued dividend stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued dividend stock that is more promising than WBA but that trades at less than 7 times its earnings and yields nearly 10%, check out our report about the dirt cheap dividend stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. This article is originally published at Insider Monkey.