U.S. Markets closed

My 2 Favorite Dividend Stocks With 4% Yields

Daniel Miller, The Motley Fool

Too many investors overlook the power of dividends. In fact, since 1926, dividends have generated nearly half of stock investing profits from companies within the S&P 500 index. Further, dividend stocks offer investors consistent income and are often more stable businesses. When investors can scoop up dividend stocks that also have upside, it's an excellent opportunity. Anheuser-Busch InBev (NYSE: BUD) and General Motors (NYSE: GM) are two of my favorite dividend stocks with current yields topping 4%.

The next auto megatrend

Many investors have a difficult time looking past General Motors' previous faults, and that's understandable. But if you've been paying attention, Detroit's largest automaker has changed drastically since the last recession forced its bankruptcy. It's changed its culture, exited markets that have been unprofitable for decades, and, instead of ignoring future trends like the old General Motors did, has jumped on the upcoming driverless-vehicle opportunity.

The race toward driverless vehicles, and the lucrative economy it will generate, is on and GM is ahead of the game. Intel predicts a $7 trillion annual revenue stream to be driven by driverless vehicles. According to Intel, "the companies that don't prepare for self-driving risk failure or extinction." And while GM's self-driving subsidiary, GM Cruise, hasn't been invisible, it hasn't received nearly enough attention this year.

More specifically, the story heated up in May when SoftBank Vision Fund announced it would invest $2.25 billion in GM Cruise as it ramps up to produce self-driving taxis at scale in 2019. That investment from SoftBank values GM Cruise at $11.5 billion -- a massive increase from GM's initial 2016 Cruise Automation purchase for a little more than $1 billion. Here's the kicker: RBC Capital Markets auto analyst Joseph Spak did some calculations about what those taxis could eventually generate and came up with the possibility that GM Cruise could be worth a staggering $43 billion.

GM Cruise is one of the biggest Detroit automaker stories in decades, and it proves the ancient automaker can indeed learn new tricks and adapt to the next megatrend. But for those investors needing more proof the company is viable in the near term, GM's all-new pickups -- products that are incredibly important to Detroit automakers -- will arrive at dealers this fall. That could mean a speed bump as older trucks sell for thinner margins, but it should mean a strong boost in profitability and margins in 2019 as the new pickups generate more of the sales volume. Further, one criticism of GM's trucks was that they didn't compete with rivals at the very high end of the luxury truck market, but management said it expects a wider range of trims and offerings with the next-generation truck to help narrow that gap. GM's bread-and-butter product will be new and will drive revenues and profits higher soon.

GM's 2019 Chevrolet Silverado driving on a dirt road.

2019 Chevrolet Silverado High Country. Image source: General Motors.

Despite a near-term catalyst of dependable full-size trucks and a long-term catalyst of driverless-vehicle revenue, Wall Street isn't buying the story as the U.S. new vehicle market peaks. While that's fair, to some degree, one could argue that is already priced into the stock: The company trades at a paltry 5.8 forward price-to-earnings ratio. On the bright side, that gives investors a cheap entry point, a juicy 4.25% dividend yield, and potential long-term upside if it can capitalize on the driverless-vehicle opportunity -- and that's why it's one of my favorite dividends above 4%.

Bud is wiser

Anheuser-Busch InBev, which became the world's largest brewer through mergers that included the recent SABMiller blockbuster, is truly the king of beers with brands including Budweiser, Stella Artois, Foster's, Michelob, and a list of acquired craft beers, among many others. In addition to its impressive 5.3% dividend yield, it offers investors upside as it squeezes costs out of its business, expands overseas, and focuses on higher-margin sales.

Anheuser-Busch is massive, with more than 19 billion-dollar brands, and it uses its grand scale and efficient operations to squeeze costs out of its business and acquisitions. During the second quarter, EBITDA margin expanded by 85 basis points to 39.7%, aiding a 7% jump in total EBITDA. Management has proven adept at generating synergies with acquisitions. Take a glance at the $2.5 billion in merger-related cost savings already achieved, well on the way to the $3.2 billion goal that management believes to be achievable over the next two to three years.

Bar chart showing $2.5 billion in cost synergies generated since 2016

Graphic source: Anheuser-Bush Second-Quarter 2018 Results, July 26, 2018.

Investors can expect Anheuser-Busch to continue squeezing costs to help boost margins, but there's more growth to be had. And while the king of beers is far too large to be an explosive growth company, it has remaining growth potential overseas and can grow through premium brands. With the acquisition of SABMiller came a larger presence in Africa, among other regions, which opens the company up to fast-growing beer markets such as Nigeria. Here's a unique perspective from a fool.com colleague in Africa.

In addition to overseas growth in Africa, among other regions, Anheuser-Busch has an opportunity to focus on brands that sell at a premium, such as Michelob Ultra and Stella Artois, especially as sales of Bud Light and Budweiser slow in the U.S. market as tastes shift from beer to spirits. One example is its Michelob Ultra brand, a low-calorie beer that checked in as the top market share gainer during the second quarter, which it has achieved for 13 consecutive quarters. Management also noted during the second quarter that its recent innovations -- Michelob Ultra Pure Gold, Bud Light Orange, and Budweiser Premium Reserve -- all performed well.

Three beers placed on a bar top.

Image source: Getty Images.

Ultimately, investors can expect consistent top- and bottom-line growth from the massive beverage company as it squeezes costs out of its operations, focuses on premium brands and innovative new products, and expands overseas. But to make it more enticing, Morningstar.com believes the stock to be roughly 27% undervalued, making its fat 5.3% dividend yield one of my favorites currently.

Both General Motors and Anheuser-Busch offer dividends topping 4%, as well as opportunities to expand their business through their global brands and potential catalysts with a new focus on driverless vehicles and premium beer products.

More From The Motley Fool

Daniel Miller owns shares of General Motors. The Motley Fool owns shares of and recommends Anheuser-Busch InBev NV. The Motley Fool has a disclosure policy.