Dividends can be a great way to book a return on your investment portfolio no matter what stock prices are doing. But with the S&P 500 (SNPINDEX: ^GSPC) yielding just 1.3%, many stocks simply don’t yield enough to be viable sources of passive income or supplement income in retirement.
Packaged food giant Kraft Heinz (NASDAQ: KHC) yields about 5.3%, which is more than investors can get from most high-yield savings accounts or a 10-year Treasury bond. But unlike Treasury bonds, which are backed by the U.S. government, a dividend is only as good as the company paying it.
Here’s a look at whether Kraft can support its payout and if this high-yield dividend stock is worth buying now.
The main issue with Kraft is that the business is barely growing. In 2024, net sales declined by 3% year over year. Adjusted operating income rose 1.2%, and adjusted earnings per share (EPS) was up just 2.7%. Free cash flow (FCF) was the standout: up 6.6% year over year. Kraft Heinz used its $3.2 billion in FCF to pay $1.9 billion in dividends and repurchase $988 million worth of its shares.
This year’s guidance calls for organic sales to be flat or down 2.5%, adjusted EPS to fall 12.3% at the midpoint, and flat FCF. Although the guidance isn’t great, Kraft remains a stable cash cow that is generating plenty of FCF to easily support its dividend.
Any time a stock has a higher-than-historical yield, it’s usually because the share price hasn’t done well, so the dividend yield goes up. Some companies will routinely raise their dividends year after year, but the yield will fall over time because the stock price is outpacing the dividend growth.
In 2019, Kraft slashed its quarterly payout from $0.625 per share to $0.40 per share and has kept it the same ever since — for 25 quarters in a row. Given the poor performance of the business in that period, it makes sense that Kraft hasn’t raised the dividend. But with the yield up to 5.3%, investors may be wondering if another dividend cut is in the cards.
As mentioned, Kraft was able to support its capital return program (dividends and buybacks) with FCF last year. This year, it is guiding for flat FCF. And since the dividend has also been flat, Kraft should make plenty of FCF to cover the payout.
The following chart shows how the stock price is down significantly from before the dividend cut. However, the cut was arguably the right decision because it made the payout more affordable for the company.
As you can see in the chart, Kraft has consistently generated plenty of FCF to cover the payout since the dividend cut. Another good sign that the company’s fundamentals are improving is its balance sheet. Its total net long-term debt has come down, as have leverage ratios like financial debt-to-equity and debt-to-capital.
