Should You Scoop Up These 3 Stocks Yielding More Than 5% in Dividends?

We may be in an investing environment marked and marred by low interest rates. It’s less than accurate, however, to suggest no stock currently offers above-average dividend yields. International Business Machines (NYSE: IBM), Altria Group (NYSE: MO), and Southern Copper (NYSE: SCCO) are all paying out more than 5% of their price right now, and there’s little reason to think those dividends are in jeopardy.

There’s a flipside to this coin, however. That is, with the Federal Reserve’s expectation for around eight quarter-point rate hikes between now and the end of 2024, the market’s biggest dividend payers could also be its most vulnerable names. See, part of the adjustment for higher interest rates includes lower prices for dividend-paying stocks, effectively bumping up their dividend yield.

If that’s what’s holding you back from stepping into any or all three of these dividend stocks though, don’t let it. These tickers might seem to be in dire straits, but there’s more to the story.

A deeper dive into what drives their dividends

It’s a tricky matter to be sure. The dividends being dished out by metal-miner Southern Copper, tobacco giant Altria, and recovering technology outfit IBM are juicy. Given the environment though, these yields also seem a bit too good to be true. All have a history of growing their annual payments, to be sure. It seems unlikely, however, that any of their dividend growth rates could keep up with the current inflation rates or the impending rate hikes meant to curb that inflationary pressure. In fact, if anything, inflation is making it more difficult for businesses to do business; customers will eventually balk at higher prices.

Be careful of getting blindly married to the stock market’s most pervasive “if-then” constructs though. Some of them pan out some of the time. But, the market is also fluid and complex; there are always unseen and unpredictable forces at work that will surprise you. Case in point: Stocks rallied for nearly two years despite the COVID-19 pandemic ripping the global economy to shreds during the first half of that advance.

That’s not the only reason you may want to refrain from overthinking investing outfits like the aforementioned Altria, Southern Copper, and IBM. In all three cases, their respective businesses either defy the inflation the Fed is fighting or thrive on it.

Image source: Getty Images.

Take IBM, for instance. While you probably know it is a computer hardware company, that’s not even close to being all the company does. More than two-thirds of last quarter’s top line came from consulting and software, both of which are deliverable at fairly fixed costs that aren’t impacted by the price of raw materials. Both are also necessary to their buyers, even if the worldwide economy gets a bit choppy as the conflict unfolding in Ukraine augments the economic challenges linked to rising interest rates.

Altria is another example of a company that’s better-shielded from inflation than one might initially believe. While tobacco is a raw material that’s directly subject to rising market prices, smoking and smokeless tobacco are vices most consumers don’t give up simply because they’re paying more to continue the habit. This year’s price increase for a pack of cigarettes so far (according to figures from the Bureau of Labor Statics), in fact, is a modest 4%. That’s actually the lowest price-hike a pack of cigarettes has experienced since 2018.

The diversification kicker: Altria also owns a sizable stake in another little “vice” company called Anheuser-Busch InBev NV.

As for Southern Copper, if anything it’s a beneficiary of the very inflation that’s seemingly racing out of control.

While higher gasoline and labor prices can eat into the profitability of mining, copper prices still stand near their record-breaking price of $4.84 per pound. hit in the first half of last year. For perspective, that’s more than twice copper’s value from just seven years ago following a multi-year price pullback. The stock’s performed accordingly.

Experts aren’t looking for any long-term relief anytime soon here either. For example, in a recent discussion of the matter, analysts with S&P Global Market Intelligence forecast that the refined copper market “will move into a 279,000-tonne deficit by 2025 from a 142,000-tonne surplus in 2020.” The commentary goes on to say, “Our base case forecast from 2026 to 2030 sees the copper industry unable to meet growing demand for concentrate.” Rystad Energy sees it too, estimating the worldwide supply of copper will improve by 12% a year through 2030, but with that growth being outpaced by 16% growth in consumption during that time. All told, Rystad fears demand will exceed the world’s supply of copper by 6 million tons through the rest of this decade.

The point is, Southern Copper should enjoy dividend-supporting pricing power for a long, long time. This pricing power may even support significant dividend payout growth.

There’s more than one thing going on here…in a good way

None of this is to suggest you should simply turn a blind eye to the current dynamic. Investors should always respect the potential fallout from rising inflation and subsequently rising interest rates. Everything matters to some degree, sooner or later.

If you’re in investor looking for above-average dividend yields though — and you don’t mind some price volatility while you collect that income — don’t be afraid to wade into higher-yielding names like Altria, IBM, or Southern Copper here. They’ll face headwinds soon if they’re not facing them already. They’re also catching some tailwinds though, even if nobody’s talking much about those.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool recommends Anheuser-Busch InBev NV. The Motley Fool has a disclosure policy.

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