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Should You Buy the 3 Highest-Paying Dividend Stocks in the Nasdaq-100?

Motley Fool - Wed Mar 20, 7:15AM CDT

It can be hard to find good dividend stocks without taking some short cuts as you create a list of investment candidates. For example, you might just pick out the highest-yielding stocks from an index like the Nasdaq-100 as you start your research. Although this index is heavily oriented toward technology, the three top yielders hail from outside that industry.

The trio includes pharmacy chain Walgreens(NASDAQ: WBA), consumer staples maker Kraft Heinz(NASDAQ: KHC), and energy producer Diamondback Energy(NASDAQ: FANG). Each has a yield soundly above 4%. But don't just buy these companies blindly; in fact, only one seems to have a story that a long-term dividend investor might find compelling.

Warning: Walgreens just cut its dividend

When Walgreens released its fiscal 2924 first-quarter earnings results, it also announced that it would be reducing its dividend by 48% to $0.25 per share per quarter. The dividend yield based on the new, lower payment is roughly 4.8%, still high enough to place it atop the Nasdaq-100. But a dividend cut is usually not good news, and that's decidedly the case with regard to Walgreens.

The company has been attempting to shift gears within the healthcare space for several years now. First, it attempted to expand from its retail base into the pharmacy benefits management business, but that didn't pan out. Now it is working to build a medical clinic business. However, the CEO that spearheaded that change has left the company and been replaced.

The new CEO has only been there about six months and is revamping the leadership team under him, which suggests that the retailer's corporate direction could end up changing (again). At the very least, Walgreens remains in a state of flux. Add in the big dividend cut, and most dividend investors should probably wait on the sidelines until the new CEO has a bit more of a track record.

Kraft Heinz is finally back in fighting shape

Iconic food maker Kraft Heinz has spent a few years lost in the woods. After the merger of Kraft and Heinz, which created the current enterprise, the focus was on cost-cutting. That can only take a company so far before it needs to start growing its business. That initial attempt to shift from cost-cutting to growth stumbled. Add in the upheaval around the coronavirus pandemic and inflation, and the investing thesis for Kraft Heinz wasn't very compelling for a while. But 2023 may have marked a key turning point.

First off, the company's leverage has been reduced so that it is back within management's target range. That means Kraft Heinz is finally working from a position of balance sheet strength. Second, revenue rose 0.6% for the year, with organic sales up 3.4%. While price increases were a big part of that strength, the company was able to boost its gross margins by 280 basis points.

In other words, the company appears to be doing a solid job of dealing with inflationary headwinds. And third, 65% of Kraft Heinz's portfolio is made up of brands that it believes have strong growth opportunities ahead of them.

To be fair, the dividend has been static since it was cut to $0.40 per share per quarter in 2020. Kraft Heinz stock would be far more compelling if the dividend were actually growing again. But it looks increasingly like this 4.6%-yielding consumer staples giant has finally gotten back on track. And that probably makes it the best option of this trio for long-term dividend investors.

Diamondback's dividend isn't meant to be reliable

Most investors looking at high-yield stocks are trying to find a reliable dividend payer that produces an attractive level of passive income. On the surface, Diamondback Energy's 4.2% yield would appear appealing relative to the rest of the Nasdaq-100 stocks, 97 of which have lower dividend yields. However, there's a huge "but" here because Diamondback Energy has a variable dividend policy that effectively ties the total dividend to the company's financial results.

This is a material problem if you want a consistent income stream given that Diamondback is an energy producer. This means that its financial performance is directly tied to the price of highly volatile commodities. While there is a base component to the quarterly dividend payment, it was just $0.90 per share in the first quarter of 2024. The variable part amounted to a huge $2.18 per share. While the variable dividend is a good way to ensure that shareholders benefit directly from high oil prices, the stock is not a good option for anyone that is seeking a consistent income stream.

No, maybe, and only if you understand it...

Picking the top three highest-yielding stocks from the Nasdaq-100 clearly isn't a simple solution for investors trying to find reliable dividend stocks. You still need to dig into the story behind each company.

Walgreens just cut its dividend and the business is in a transition phase. Most investors will probably want to avoid it. Kraft Heinz has gotten its balance sheet and portfolio into better shape, which should interest investors even though the dividend hasn't yet started to grow again.

And Diamondback Energy's dividend is variable, so you can't really count on the yield. Some people might be OK with that, but it could be an unwanted surprise to those that don't understand the dividend policy and its impact on the payment.

Still, at the end of the day, maybe one out of three ain't too bad.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.

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