3 High Dividend Yielders for Consideration

Image: Energy Transfer, Philip Morris, and Altria have outperformed the SPDR S&P 500 Dividend ETF (SDY) since the beginning of 2024.

By Brian Nelson, CFA

The market remains laser-focused on inflation readings and employment trends – two of the main dynamics that influence policy at the Federal Reserve. Since the beginning of 2024, the market has ratcheted down expectations of rate cuts from as many as 5 or 6 to just 1 or 2 in 2024. With yields on risk-free instruments poised to go lower soon, a focus on high yielding equities may be appropriate for the income investor. Here are three high dividend yielders that we like for consideration.

Energy Transfer (ET)

Midstream pipeline operator Energy Transfer has come a long way in the past decade. Years ago, Energy Transfer was paying out far more in distributions and capital spending than it was generating in operating cash flow, causing the MLP to eventually cut its payout. Fast forward to today and the firm is doing a great job covering distributions with traditional free cash flow, as measured by cash flow from operations less all capital spending. Energy Transfer’s cash flow from operations during the first quarter of 2024 was $3.772 while the firm spent $795 million in capital spending, resulting in traditional free cash flow of ~$2.98 billion, far in excess of distributions paid to partners, noncontrolling interests, and redeemable noncontrollable interests. We like Energy Transfer’s EBITDA growth, free cash flow coverage of the distribution, and improved credit quality. Shares yield 7.9% at the time of this writing.

Philip Morris (PM)

Philip Morris’ recent acquisition of Swedish Match has accelerated its smoke-free ambitions, with its smoke-free business now accounting for just less than 40% of its total net revenues. Looking ahead to full-year 2024 guidance, management is targeting net revenue growth of 7%-8.5% on an organic basis and reported diluted earnings per share in the range of $5.70-$5.82, which compares to $5.02 per share during 2023. Organic operating income growth is expected to be in the range of 10%-12% on the year. Adjusted diluted earnings per share is expected in the range of $6.55-$6.67, up 9%-11% when compared to 2023. Philip Morris is targeting free cash flow of $8.8-$9.8 billion, reflecting operating cash flow of $10-$11 billion and capital spending of $1.2 billion. We like Philip Morris’ free cash flow generation and its focus on continuing toward becoming a smoke-free company thanks in part to the explosive demand for Zyn nicotine pouches. Shares yield ~5.1% at the time of this writing.

Altria Group (MO) 

Altria has some notable goals through 2028, including a mid-single-digit annual adjusted diluted earnings-per-share compound annual growth rate and a dividend growth goal that targets a similar pace of dividend-per-share expansion. The company plans to maintain a relatively flat debt-to-EBITDA ratio of 2.0x in the coming years (it was 2.2 at the end of 2023), while it plans to keep its total OCI margin at a level of at least 60% in each year through 2028 (it was 60.3% in 2023). The environment for smokeable products remains challenging, but Altria’s pricing power is noteworthy. The company recently sold part of its investment in Anheuser-Busch Inbev (BUD), and it is buying back stock. Altria’s free cash flow continues to cover its cash dividends paid by a nice margin, and we think the company’s ~8.5% dividend yield is too hard to pass up for the income investor.

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