Dividend stocks have accounted for the vast majority of returns in the stock market since the start of the 20th century. Consequently, it is imperative to have at least a few top dividend payers in a well-rounded portfolio.
Which dividend stocks are worth considering? Tobacco giant Philip Morris (PM -0.35%) and U.S. wireless titan Verizon Communications (VZ 1.41%) are two of the most popular high-yield dividend stocks in the market today.
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Here is a head-to-head comparison of how they stack up.
Philip Morris: An undervalued high-yield dividend stock
Philip Morris, the world's largest tobacco company by market share, has been one of the best performers in its peer group over the past 10 years. The company's pivot to a smoke-free future and evolving product portfolio have allowed it to stay ahead of the ongoing secular decline in smoking across the globe.
What does Philip Morris stock offer? The tobacco giant sports a hefty 5.2% annualized dividend, a track record of dividend increases that stretches back to its origin as an independent public company in 2008. It has boosted its cash payout by a healthy 7.2% per year, on average, over this period.
To put this into context, the average dividend raise among the world's most reliable income stocks presently stands at about 6% (author's own data). That said, the tobacco titan's payout ratio has ballooned to over 100% in the past 12 months, implying that future raises may be less generous.
What's ahead? Some analysts think the company's smoke-free alternatives like iQOS haven't been fully priced into the stock. Speaking to this point, Philip Morris' shares trade at a meager 16 times forward earnings, well below the 22.6 multiple of the S&P 500.
Verizon Communications: A top income stock
Verizon, the largest wireless U.S. company by market share, hasn't been a great performer for investors over the prior 10 years. Stiff competition, hefty capital expenditures, and pricing wars have weighed on its shares over this period.
Still, Verizon sports a mouthwatering 6.6% dividend yield, making it one of the highest-yielding stocks in the Dow Jones. Its elevated payout ratio of 99% is an important cautionary note, however. After all, Wall Street isn't expecting much in the way of revenue growth near-term, with most forecasts calling for low single-digit top-line growth over the next three years.
That said, the telecom giant has raised its dividend for 17 straight years, underscoring management's commitment to rewarding loyal shareholders. Its shares also trade at a mere 8.75% times forward earnings, which is extremely cheap for a top dividend stock.
All told, Verizon's dividend and valuation are attractive, but its stock is primarily an income vehicle at the moment.
Verdict
In this match-up, Philip Morris comes across as the more compelling buy. The tobacco company is already well into its next product cycle, a trend the broader market doesn't seem to fully appreciate yet based on its relatively low valuation. This fact makes its shares attractive for income and value investors alike.
Verizon, on the other hand, has some work to do to improve its long-term value proposition.
