While Vector Group looks interesting, with such a high dividend the market believes there is a problem. Looking at the financial statements, the company has a significant amount of debt, which it continuously adds to. The company has been paying out more in dividends than it brings in in free cash flow for years. In 2012 the company paid $137 million in dividends but only brought in $70 million in free cash flow. Over the past five years the debt load has tripled to $680 million and shareholder equity has remained negative. The company has been expanding its debt load by issuing debt that converts into shares. While this lowers interest payments, it destroys shareholder value. The company can provide income for some time but is slowly destroying shareholder value by issuing so much in debt. If something is unsustainable, it will stop, and you don’t want to be the one left holding the bag. I’d pass on Vector Group.
However, the tobacco industry has been a great hunting ground for investors. While no tobacco companies pay as high a dividend as Vector Group, long-term investors would do well to look at Altria Group Inc (NYSE:MO) in the U.S. or Philip Morris International Inc. (NYSE:PM). Both were part of the original Phillip Morris conglomerate that split up around 2008 by spinning off Kraft Foods Group Inc (NASDAQ:KRFT) and Phillip Morris International. Both businesses are leaders in their respective markets — Altria Group Inc (NYSE:MO) in the U.S. and Phillip Morris the world, excluding China and the U.S — and have exceptionally high-returning businesses. This is in part due to both having one of the top brands in the world with Marlboro. For dividend investors, the key part is that both have long-term histories of steadily increasing their dividends. If I had to choose just one, while Altria has a higher yield than Phillip Morris (4.9% vs. 3.9%), I would go with Phillip Morris. The company has better growth prospects and a lower payout ratio, and the business is far more diversified in terms of legal risk, whereas Altria Group Inc (NYSE:MO) could be hurt by any laws or rulings that go against tobacco companies in the U.S.
Foolish bottom line
Remember, these seemingly irresistible yields could be ticking time bombs, so do your own due diligence. Also, make sure you diversify your picks across various sectors. As investors relearn every decade or so, you never want to put all your eggs in one basket — no matter how tempting the dividends are.
The article The 25 Highest-Yielding Dividend Stocks in June originally appeared on Fool.com and is written by Dan Dzombak.
Fool contributor Dan Dzombak can be found on Twitter @DanDzombak or on his Facebook page, DanDzombak. He owns shares of Altria Group, Phillip Morris International and Frontier Communications. The Motley Fool owns shares of United Online.
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