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

Dividends can be tricky.

Sometimes, a generous dividend yield comes from a thriving company eager to share its surplus cash profits with shareholders. I'm talking about dividend policies fully funded by the company's free cash flows, typically increasing by a few percent every year. This is a robust cash machine at work, and a powerful income generator for patient investors.

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Other times, high yields indicate a business in deep trouble. It could be a temporary situation, with stock prices diving for short-lived or fixable reasons. Stocks in this category could be great long-term investments, as new money can lock in a low starting price and high effective dividend yield.

Or it might be a deep-rooted problem where the board of directors uses a rich payout to make the financial situation look more stable than it is. This is the category you want to stay away from -- red flags and warnings signs aplenty.

So let's take a look at the top three dividend yields in the S&P 500 (SNPINDEX: ^GSPC) market index as of March 26, 2025. Why are their current yields so high? Should you buy them hand over fist, or are they better left alone?

1. Dow Inc. yield: 7.9%

Materials science giant Dow (NYSE: DOW) brings the largest dividend yield to the table today. The company has been sending out quarterly dividend checks of $0.70 per share since the DowDuPont restructuring was completed in the summer of 2019. This is not a story of dividend growth, but the payouts have sure been reliable.

Dow's yield tends to hover in the 4%-5% range in the long run, but they are up recently because of sharply falling stock prices. It faces macroeconomic issues such as a global patchwork of aggressive export tariffs, high production costs, and limited demand for many key products. You could call Dow's stock a solid buy today, if you expect the economic tension to fade away over time. But the challenges have resulted in negative cash flows and diving top-line sales, so Dow is paying those dividends out of its cash reserves -- hardly an ideal setup.

Most investors should probably leave Dow stock alone in 2025. It's a turnaround story in progress, and there are no guarantees it will work out in Dow's favor.

2. LyondellBasell Industries yield: 7.7%

Next up is fellow chemicals titan LyondellBasell Industries (NYSE: LYB). This leading producer of plastic resins and ethylene gas is in the same boat as Dow. Revenues are down in the last three years and free cash flows are dipping lower -- but at least they're still positive and larger than the dividend costs.

So LyondellBasell's payouts have more substance than Dow's at the moment. The policy also has a longer history stretching back to 2011, and a near-perfect streak of annual dividend increases since then. The dividends held steady in 2019 and 2020, but returned to growth with a 7.6% increase in 2021.

I wouldn't mind including this basic materials veteran in an income-oriented portfolio. Investors should keep an eye on the balance between cash flows and dividend expenses, watching for signs of future payout cuts. But the company also has more than two years' worth of dividend checks in its cash reserves. It would take a long period of weak business to undermine this robust dividend policy.

3. Walgreens Boots Alliance yield: 7.4%

And then there's pharmacy and convenience store veteran Walgreens Boots Alliance (NASDAQ: WBA). The dividend history doesn't really matter in this case, because private investor group Sycamore Partners is taking Walgreens off the public market soon.

Sycamore will pay $11.45 per Walgreens share, plus up to $3 per share if and when the private equity firm sells the company's financial interests in the VillageMD primary healthcare business.

The deal is fully financed and expected to close in the fourth quarter. I don't expect any further dividend payouts with this done-and-dusted exit on the table. The quarterly payouts were cut in half last year anyway, and free cash flows are hovering around the breakeven point. Walgreens Boots Alliance is not the wealth-building dividend stock you're looking for.

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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.