International Business Machines (NYSE: IBM) does pay a nice 4.3% dividend yield, but isn't a great choice for everyone. It faces some pretty big challenges going forward, such as increasing competition and the pricing pressure it creates. In fact, even dividend-loving Warren Buffett decided to unload Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) massive IBM stake recently.
With that in mind, there are some stocks that pay more than IBM that may be worth a look. These three Motley Fool contributors have their eyes on Tanger Factory Outlet Centers (NYSE: SKT), Dominion Energy (NYSE: D), and ONEOK (NYSE: OKE), and here's why.
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The right kind of retail stock to buy
Matt Frankel (Tanger Factory Outlet Centers): It's no secret that the retail sector is facing some pretty big headwinds right now. There's been a multiyear wave of high-profile retail bankruptcies and store closures, and once-great retailers like Sears (NASDAQ: SHLD) and J.C. Penney (NYSE: JCP) are struggling to survive.
From a long-term investor's perspective, this has created an opportunity to buy some solid retail stocks at huge discounts. Real estate investment trust (REIT) Tanger Factory Outlet Centers is perhaps my favorite retail stock right now, with a near-6% dividend yield and a price-to-FFO multiple of just 10.
Tanger is the only pure-play outlet shopping REIT, with 44 outlet centers in 22 states and Canada. Most of the company's tenants are rock-solid brands with strong balance sheets and no real danger of bankruptcy. And discount-oriented retail is actually doing quite well as a whole. For example, just look at the recent stock performance of Five Below (NASDAQ: FIVE) and TJX Companies (NYSE: TJX), the parent of TJ Maxx and Home Goods. Outlets are in the same boat: They offer bargains that are tough to match, even online. The discount nature of outlets also makes the business recession-resistant.
This is why Tanger's occupancy rate is still at 96%, and why it has been able to keep occupancy above 95% throughout its 25-year history. It also explains how it has been able to raise its dividend every single year. With the current payout well covered by the company's FFO, there's no reason to think the streak will be in jeopardy anytime soon.
In fact, with a relatively small amount of outlet space in the U.S. as compared to other types of retail, I wouldn't be at all surprised to see the outlet industry grow considerably once the retail environment stabilizes. And if it does, Tanger's brand name, expertise, and financial resources should give it a big competitive advantage.
High yield backed by growing dividends is what you need
Neha Chamaria (Dominion Energy): Dominion Energy's dividend yield of 4.7% may not seem too high when compared to IBM's, but it'll likely be more sustainable than Big Blue's yield. And that's really important for any income investor. While IBM is also committed to increasing its dividends annually, it lacks the kind of vision that Dominion Energy has: The utility aims to increase dividends by 10% in 2018 and again in 2019, and between 6% to 10% in 2020, backed by compounded earnings-per-share growth of 6% to 8% through 2020. I doubt IBM will offer anywhere close to a 10% hike in its dividend.
Granted, Dominion Energy's payout of around 70% is at the higher end, but it shouldn't be tough for the utility to maintain dividends given the highly regulated nature of its revenue. Of late, the market has been concerned about a couple of developments, including Dominion's impending acquisition of SCANA Corp. (NYSE: SCG) and its planned funding route that is now in the reworks because of regulatory changes.
Dominion is, however, confident it can weather the issues even as it advances its other growth projects, which include the modernization of grids and expansion of gas pipelines. In any case, even if Dominion has to make tough decisions about SCANA or its financing plans, I don't foresee the company breaking its 15-year streak of dividend increases. And if its dividends don't rise 10% as projected, the stock could still end up paying you more than IBM in terms of dividend growth and yield.
In a class of its own among dividend stocks
Matt DiLallo (ONEOK): With a current yield of 4.9%, ONEOK is comfortably ahead of IBM's payout. And that lead should widen considerably in the coming years because the pipeline giant expects to increase its dividend at a 9% to 11% annual pace all the way through 2021. Fueling ONEOK's high-octane dividend growth are the more than $4 billion of high-return energy infrastructure projects it has under construction.
With a high current yield that it expects to grow at a high rate, ONEOK is in a class of its own. Of the stocks that make up the S&P 500, ONEOK is the only large-cap company that also boasts an investment-grade credit rating, has a high dividend yield of more than 3%, and is on pace to grow both earnings and its payout by at least a 10% annual rate through 2020. Investors shouldn't overlook these factors, because high-yield stocks not only tend to outperform lower yielding stocks, but also do so with less volatility. Meanwhile, dividend growth stocks have historically outperformed their no-growth and stingier peers by wide margins.
While these factors don't guarantee that ONEOK will outperform other higher-yielding dividend stocks like IBM from here, they do help increase the probability that ONEOK delivers a healthy dose of income with upside in the future. That's why investors who are intrigued by IBM's dividend should at least take a look at ONEOK's unique value proposition.
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Matthew DiLallo owns shares of Berkshire Hathaway (B shares). Matthew Frankel, CFP® owns shares of Berkshire Hathaway (B shares) and Tanger Factory Outlet Centers. Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool recommends Berkshire Hathaway (B shares) and Five Below. The Motley Fool has a disclosure policy.