Key Points
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PepsiCo, Best Buy, and Philip Morris pay 3% to 4.4% yields backed by growing revenue, new deals, and recent dividend raises.
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Kraft Heinz’s 6.5% yield has not been raised since 2019 and sits on a business with falling sales and a paused breakup.
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Universal Corp.’s 8.4% yield comes from a company that lost money last quarter, a reminder that a long streak is not the same as a safe dividend.
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A high dividend yield is either a gift or a warning, and the number itself will not tell you which. Yield is just the payout divided by the share price, so it can go up for two very different reasons: either because a company keeps raising the dividend or because investors keep selling the stock. The first kind of yield is earned. The second kind is a value trap wearing a nice suit.
The way to tell them apart is to look past the percentage at what the company is doing. Is it growing earnings faster than the dividend, launching products, winning customers? Or is it holding the payout flat and hoping nobody notices the business shrinking underneath it? Three consumer companies below pass that test. Two do not.
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Buy: PepsiCo, 4.4% and a 54-year streak
PepsiCo (NASDAQ: PEP) yields about 4.4% at a share price near $141, the highest it has been in years, and it has raised its dividend for 54 consecutive years. This 50+ year increase makes this company a Dividend King. The payout is $1.48 a quarter, up 4% this year. What makes the yield earned rather than suspicious is what the company did in October: It renewed its beverage deal with Taco Bell for another 11 years, days after losing KFC’s fountains to Coca-Cola (NYSE: KO), which told you how hard PepsiCo will fight for the accounts it still has. Third-quarter revenue grew 5.6% to $25.3 billion, and management said it will take “additional structural cost reduction actions” to fund growth.
Buy: Best Buy, nearly 4% from a retailer that is growing again
Best Buy (NYSE: BBY) pays $0.96 a quarter, has raised the dividend for 21 straight years, and yields close to 4%. The reason to own this company now is that the business turned a corner this summer. Q2 comparable sales rose 4.1% against a company forecast of about 1%, and Best Buy raised its full-year sales and earnings outlook. Newer categories like AI-powered glasses and trading cards more than doubled, per Bloomberg. In October, the company launched Best Buy Gamers, a dedicated gaming hub, ahead of a holiday season with Grand Theft Auto VI on the calendar.
Buy: Philip Morris, a smaller yield that keeps climbing
Philip Morris International (NYSE: PM) yields about 3.2%, lower than the other two, but it just raised the dividend 8.8% to $1.60 a quarter, its 17th straight annual increase. That raise is funded by a company that reported record quarterly revenue, gross profit, and operating income in October. The smoke-free business, built on IQOS heated tobacco and ZYN nicotine pouches, now accounts for more than 40% of revenue, and operating income grew 14%. The payout ratio is high at around 90% of reported earnings, which would be a worry if profits were flat. They are not: Operating income grew 14% last quarter and adjusted earnings rose 5%.
Avoid: Kraft Heinz, a 6.5% yield that has not moved since 2019
Kraft Heinz (NYSE: KHC) yields about 6.5%, and on a screen it looks like the best deal on this list. It is not. The quarterly dividend has been $0.40 since the company cut it in 2019, seven years without a raise. Q3 net sales fell 2% and adjusted operating income fell 15%. The plan to split the company in two, announced last year, was put on pause in February. The yield is high because the stock has fallen to about $24 while the payout sat still. That is the second kind of yield, and the only thing it tells you is that the market expects less from this business, not more.
Avoid: Universal Corp., an 8.4% yield on a company that lost money last quarter
Universal Corp. (NYSE: UVV) is the world’s largest supplier of leaf tobacco, and it yields about 8.4% after 56 straight years of dividend increases, which is why it shows up on so many income lists. (Incidentally, its record of dividend increases makes Universal Corp. a Dividend King.) The first quarter of its fiscal year told a different story: Revenue fell 12%, the company posted a net loss, and management blamed an oversupply of tobacco that has customers delaying purchases. The dividend now costs several times what the company earned over the past year. A 56-year streak is impressive, but a streak does not pay the dividend. Earnings do, and right now there are not enough of them.
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Micah Zimmerman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Best Buy. The Motley Fool recommends Kraft Heinz and Philip Morris International. The Motley Fool has a disclosure policy.
