By Al Root
Just 22 non-real-estate stocks in the S&P 500 index have dividend yields above 5% -- and even fewer are worth owning. But for investors looking for income with the possibility of stock appreciation, that's more than enough.
A 5% yield is something of a sweet spot. It's more than investors can earn in money-market funds -- the Vanguard Federal Money Market fund yields about 3.6% -- or long- and short-term Treasuries, and only slightly less than the 5.9% available on high-grade bonds. The stocks also offer the possibility of price appreciation if the company can grow its business.
Of course, high-yielding stocks are typically high-yielding for reasons and could be facing dividend cuts. The key is separating winners from losers by focusing on dividend coverage -- the cash flow and earnings needed to cover the payouts -- and the potential for improving businesses.
Food stocks provide fertile ground for this exercise. There are seven consumer-staples stocks in the 5%-plus club, with Slim Jim owner Conagra Brands' recent yield of 9.1% the highest in the S&P 500. The issues are obvious: weak consumption trends, commodity inflation that threatens profit margins, and limited cost-cutting ability, according to Wells Fargo analyst Chris Carey. Those issues make the sector a pretty lousy place to look for relatively safe income.
"[Debt] leverage and [dividend] payout ratios are nearing still manageable, but certainly uncomfortable, levels," he says.
The stock in the group with the best dividend coverage, based on 2026 earnings estimates, is soup maker Campbell's, which yields 7.5%. What's more, coverage is based on declining profits, so any improvement would just be, well, Campbell's turkey gravy.
Better opportunities lie elsewhere. Pfizer, which yields 6.4%, faces declining sales and earnings as some of its drugs lose patent protection. It's why its shares trade for less than 10 times expected earnings over the coming 12 months. Earnings, however, still easily cover expected payouts. And its Seagen acquisition, completed in late 2023, could boost growth in the coming years.
Ford Motor, like most car makers, faces below-average growth in a cyclical industry and rarely trades at a high valuation. That might limit upside for Ford stock, which yields 5.1%. But car sales are expected to remain stable, and Ford should be able to make more money in 2026 than in 2025, partly because of lower tariff pressures and reduced sales of money-losing electric vehicles. It, too, has more than enough free cash to cover its dividend.
Another relatively safe high-yielder is cigarette maker Altria Group. Its stock yields 6.6%. There isn't a financial crisis at the company -- investors simply expect high payout ratios and yields in this industry. Earnings at the Marlboro maker are expected to grow consistently as its smokeless business, including Skoal and Copenhagen, rises as the decline in its cigarette sales moderates, says Stifel analyst Matthew Smith.
Even some underperformers might be worth a look. Insurer Prudential Financial has had its share of issues recently, including employee misconduct in Japan, private credit exposure, and management turnover. Its stock was recently downgraded to Sell by Wells Fargo analyst Wes Carmichael, who noted that the shares are cheap but lack a catalyst. Still, Prudential raised its dividend in February and announced a $1 billion share-repurchase plan. Income investors can afford to wait for the missing catalyst with the stock yielding almost 6%.
For those with a shorter time frame, electric utility AES might be worth a look. The stock yields 5%, and the company is being bought out by a consortium at $15 a share, or about 6% above recent levels. Takeovers create risks in both directions: There is always the possibility of a rival bid, but AES threatened to cut the dividend if the deal fell apart, citing the need to raise capital to meet demand from artificial-intelligence data centers.
Neither scenario looks likely. The deal is expected to close in late 2026 or early 2027, meaning an investor's total return could still approach 10% for doing very little.
And that's what income investing is all about.
Write to Al Root at allen.root@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
March 26, 2026 01:30 ET (05:30 GMT)
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