Should You Buy the 3 Highest-Paying Dividend Stocks in the S&P 500?

It's hard to argue with dividend investing. Many assume dividends are mainly for retirees, and it's true that dividend income can be critically important when you're living on a fixed or semi-fixed income. But pre-retirees can benefit greatly from dividends, too -- for example, that income can be used to buy more stock!

So, if you're hunting for dividend payers for your portfolio, you may be tempted to buy into the highest-paying dividend stocks. Think twice before doing so, though. Here's why, including a look at the three highest payers in the S&P 500.

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Talking dividends

First, here's why dividend-paying stocks deserve your attention:

Data source: Ned Davis Research and Hartford Funds.

Their outperformance isn't that surprising since dividend payers have generally grown enough to have somewhat reliable income that supports a commitment to a dividend. When you start comparing dividend payers, though, here are some things to keep in mind.

Don't focus just on the amount of the dividend -- for example, favoring a $3 annual payout to a $1 one. To really compare apples to apples, you need to look at the dividend yield. Let's say the $3 payout belongs to a $240 stock. Its yield would be 1.25% ($3 divided by $240). If the $1 payout belonged to a $40 stock, its dividend yield would be 2.5% ($1 divided by $40). You would get more dividend income per dollar spent on the second stock.

That said, though, a very high yield is often a sign of trouble because when a stock's price drops, its yield goes up. So, it can be best to seek relatively high yields, but not necessarily the highest yields you can find. Here's a look at the three highest payers in the S&P 500 as of mid-June.

1. Dow

Shares of Dow (NYSE: DOW) recently sported a whopping dividend yield of 9.8%. Not surprisingly, the stock is down -- recently by more than 40% over the past year. Its five-year average annual gain is 1%, too. That's not pretty, but the dividend yield certainly is fetching.

So, why is the stock down? Well, per my colleague Daniel Foelber, it's facing weak customer demand, global competition, and high costs. Yikes. Such problems don't always last, though, and Dow is working to cut its costs and diversify even further, which can spread its risks across multiple kinds of operations. (It's been investing in recycling plastic waste, for example.)

The company hasn't been generating sufficient cash to cover its dividend payout, so unless things change, it may have to shrink the dividend. But even if the payout is cut in half, a roughly 5% dividend yield would still be way above average.

2. LyondellBasell Industries

LyondellBasell Industries N.V. (NYSE: LYB) is another chemical company that has seen its fortunes -- and its share price -- fall. Over the past year, it's down about 31%, and its dividend yield was recently 9.2%.

It, too, isn't generating enough in earnings to cover its dividend yield, so a dividend cut is not out of the question. Interestingly, though, the company announced a (modest) dividend increase in May. So management isn't looking very pessimistic. CEO Peter Vanacker said:

LYB continues to reward shareholders with a strong and growing dividend in 2025, which will mark 15 consecutive years of dividend increases....The growth of our dividend reaffirms confidence in our disciplined capital deployment, our value-driven strategy and our capability to navigate the cycle during these challenging times.

3. Alexandria Real Estate Equities

Alexandria Real Estate Equities (NYSE: ARE) is a real estate investment trust (REIT) -- a company that owns many real estate properties, charging its tenants rent. REITs are required to pay out at least 90% of their taxable earnings as dividends, and the dividend yield for Alexandria Real Estate Equities was recently a fat 7.5%.

The company specializes in leasing offices to the life sciences industry, and the fact that many people are working from home these days has put pressure on office real estate. Indeed, this REIT's stock has also fallen hard over the past year -- down nearly 34%.

Founded in 1994, Alexandria describes itself as "the pioneer of the life science real estate niche." The company owns, operates, and develops what it calls "collaborative Megacampus ecosystems in AAA life science innovation cluster locations." These are spread out among such places as Boston, San Francisco, Seattle, Maryland, Research Triangle Park, and New York City.

So, take a closer look at any of these high yielders that interest you, but know that there are plenty of other solid dividend payers out there, many with less murky near-term futures.

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Selena Maranjian has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alexandria Real Estate Equities. The Motley Fool has a disclosure policy.