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2 Stocks to Buy With Dividends Yielding More Than 5%

Keith Noonan, The Motley Fool

If you're looking for stocks that offer big yields, the utilities and telecommunications sectors make good starting points. Growth in these segments has tended to be slow but steady in recent decades, and that's meant that many companies have relied on dividends as a way to entice and satisfy investors.

Not every utility or telecom player with a dividend yield north of 5%, low earnings multiples, and a seemingly stable business will go on to be a great income play, but PPL Electric (NYSE: PPL) and AT&T (NYSE: T) are candidates that fit that profile and stand out as being worth buying at today's prices. Here's why.

A bag with the word Dividends written on it.

Image source: Getty Images.

PPL

Yield Years of Uninterrupted Payout Growth Payout Growth Over the Last 10 Years Earnings Payout Ratio
5.3% 7 19.6% 70.5%

Data sources: PPL, Yahoo! Finance, Dividend.com. Earnings payout ratio based on results over the trailing 12-month period and forward annualized payout. Table by author. 

This one's close to home. I grew up near Allentown, Pa., where PPL is based, so I have some firsthand experience with its business. I'm a short drive away from its headquarters building as I write this -- and currently a customer of its electric services.

PPL Corp., which used to be known as Pennsylvania Power and Light, will celebrate its 100th year in operation in 2020. It's also paid a dividend each quarter since 1946. The company now does roughly a quarter of its business in Pennsylvania, another quarter in Kentucky, and half from operations in the U.K. After taking a closer look at the power company's stock, there's a solid business at a reasonable valuation to go along with its big dividend yield. 

Shares trade at roughly 13 times this year's expected earnings on the heels of the company's recently reported first-quarter results, which delivered sales and earnings that came in a bit below the market's expectations due to weaker performance in its Pennsylvania and Kentucky segments. However, the company's business still looks very solid, and the stock is a worthwhile candidate for income-seeking investors. 

The company's regulated electric businesses operate with the benefit of having regional monopolies. This advantage comes with the trade-off of being more exposed to shifts in government policy, but it's a dynamic that should continue to serve well-run utilities providers in economically healthy areas fairly well. And while much of its business is pretty boring (in the desirable, utilities-company sort of way), PPL is making some relatively aggressive pushes in potential growth areas like electric-vehicle charging infrastructure. It could also see significant tailwinds from the U.K. government's push to move away the country from gas heating.

PPL expects to grow its earnings at an average compound annual rate of 5.5% at the midpoint of its target over the next couple of years even as it undertakes significant infrastructure projects across its geographic segments. Taken in conjunction with the company's big yield, sturdy outlook, and potentially underappreciated growth potential, PPL is a stock that's worth adding to an income-focused portfolio. 

PPL Corp's headquarters building.

PPL's headquarters in Allentown, Pa. Image source: PPL.

AT&T

Yield Years of Uninterrupted Payout Growth Payout Growth Over the Last Five Years Earnings Payout Ratio
6.6% 34 10.9% 71.6%

Data sources: AT&T, Yahoo! Finance, Dividend.com. Earnings payout ratio based on results over the trailing 12-month period and forward annualized payout. Table by author. 

AT&T shares are conservatively valued, trading at just nine times this year's expected earnings, and they continue to offer one of the best dividend profiles in the telecommunications sector. The company's huge yield, forward price-to-earnings multiple of just 8.5, and avenues to surpassing business expectations make it a strong, foundation-level candidate for both retirement-focused income investing and more diversified portfolios. 

Sales and earnings growth has been sluggish, and the company's DirecTV segment will likely continue to weigh on performance amid ongoing cord-cutting pressures. The company's $100 billion acquisition of Time Warner was made in order to accelerate its transition to better compete in the new media landscape, and big subscriber losses for DirecTV highlight why AT&T saw the need to make such a bold purchase. Investors should probably count on some less-than-thrilling earnings performance in the near term, but patient investors could see great results if AT&T finds a reasonable degree of success with its pivot.

AT&T has a collection of compelling assets in the entertainment and content distribution spaces, and it has opportunities and time left to figure out how to get these assets to work together with its strengths in mobile and television services. The sooner that happens, the better -- but there's a great dividend yield to provide some insulation in the meantime and other avenues to long-term growth. 

The mobile wireless space continues to look pretty strong for AT&T. While Verizon, Sprint, and T-Mobile present formidable competition, there's a good chance the latter two companies will merge at some point. It's already very difficult for new carriers to enter the market and establish significant scale, so a merger could actually help cut down on competitive pricing pressures in the market over the long term.

AT&T should be able to maintain a strong position in mobile services while also taking advantage of opportunities to provide services and platforms for a range of Internet of Things (IoT) technologies. The IoT revolution has been slower to take off than many early targets anticipated, but AT&T is already seeing momentum in categories like wearables and connected cars.

With its fantastic dividend profile, low earnings multiples, and initiatives that could help the company return to more lively growth, AT&T should be on the short list for investors looking for great dividend stocks. 

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Keith Noonan owns shares of AT&T. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.