Markets are high, as investors have rushed back into stocks on expectations that the Federal Reserve will cut interest rates at least once before year’s end. With bond yields already low, and lower rates in the offing, stocks are the natural place to turn. And among the stocks, high-yield dividends offer investors an additional income stream to supplement share price growth. Here we look at three stocks offering high dividend payouts.
Broadcom, Inc. (AVGO)
Shares in Broadcom slipped in recent sessions, when acquisition talks between the chipmaker and cyber security corporation Symantec (SYMC) broke off. Symantec ended the negotiations, saying that Broadcom’s per-share offer was too low. Both companies saw a retreat in share price; Broadcom much less.
Macro factors have been more important to AVGO’s share performance than possible acquisitions. The US semiconductor industry was hit hard last month when tariff fears flared up, but that has eased since Presidents Trump and Xi met cordially at the G20 summit and announced that formal trade talks would resume.
So, Broadcom is looking stable, but more attractive to investors is the company’s 3.73% dividend yield. While that percentage may not seem high, AVGO’s $284 share price makes the annualized payout $10.60. Quarterly, it pays out $2.65 per share. Even better, AVGO has a history of both consistent payouts and steady increases of the dividend. It’s a guaranteed income that nicely complements the stock’s 9% upside potential.
Broadcom has gained over 13% since the beginning of June, and analysts are sanguine about the stock’s future. William Stein, of SunTrust Robinson, remains “positive on Broadcom's outstanding historical track record of value creation from its investing decisions and expects its management to continue to make intelligent capital allocation decisions.” His price target, $307, suggests an 8% upside to the stock.
A look at Stein’s ratings history on Broadcom shows that he has been consistently bullish on this stock for the last year. Even better, his ratings are frequently borne out by performance – he has a 19% average return on his recommendations for AVGO shares.
Overall, Broadcom holds a strong buy from the analyst consensus, based on 21 buy ratings and 6 holds assigned in the last 3 months. The stocks $311 average price target suggests room for 9.6% growth from the $284 current share price.
Home Depot, Inc. (HD)
Home Depot leads the big-box home improvement superstore niche, with double the market share, double the share price, and triple the market cap of its largest competitor, Lowe’s (LOW). With recent positive economic indicators, especially June’s strong jobs numbers and the prospect of a Fed interest rate cut putting downward pressure on mortgage rates, the home improvement niche is looking strong.
A solid business niche leads to profit and cash flow. HD is set to release Q2 earnings on Aug 13, and the expectation is for $3.09 per share, and increase of 36% from last quarter’s $2.27 EPS. Historically, the company’s fiscal second quarter is its strongest for earnings.
HD also has a history of sharing earnings with investors through a robust dividend. The yield is a modest 2.5%, but the high share price makes the annual payout $5.44. Quarterly payments are $1.36, and HD has a history of raising the dividend each year.
The reliable dividend and profitable business model may explain HD’s popularity among investors. TipRanks tracks over 50,000 individual portfolios; among the best performing of these, Home Depot shares appear in 16.3%, or 1 out of 6. Top performing investors have increased their HD holdings by more than 2% over the past month, reflecting the overall “very positive” investor sentiment on the stock.
Investors and dividend fans aren’t the only ones bullish on Home Depot. Goldman Sachs analyst Kate McShane reviewed the stock earlier this month and gave it a $235 price target, implying an upside potential over 8%. In her comments, McShane wrote: “Home Depot hits all the marks when it comes to gaining market share and increasing operating dollar growth. Expect these two attributes to drive upside to the stock over the next 12 months.”
Home Depot’s price target presents us with the interesting case of a solid stock whose recent gains have pushed its share price above recent analyst expectations. HD is trading at $217; the average price target, however, is only $209, and still reflects older analyst ratings. As McShane’s comments and target show, Wall Street is beginning to readjust its outlook on the company. HD remains a strong buy, based on an analyst consensus of 8 buys and 5 holds in the past three months.
Philip Morris International, Inc. (PM)
Yes, this is a cigarette company, a classic “sin stock.” But investors are in the market to make a profit, and that’s where Philip Morris delivers. Year-to-date, shares in PM are up 22%. The profits come while cigarette sales are slowing, as the tobacco companies have been casting about for other business opportunities, making investments in cannabis, alcohol, and e-cigarettes.
In looking for alternate revenue streams, Big Tobacco hasn’t forgotten the investor. PM pays out a regular dividend of $1.14 quarterly. Annualized, this represents an income of $4.56 per share and a yield of 5.59%. More important, is PM’s 11-year history of growing the dividend, making this stock particularly attractive to value investors.
Secular trends – especially the poor reputation of tobacco and smoking products – may be lined up against the tobacco companies, but some Wall Street analysts see this as a buying opportunity. Writing from Goldman Sachs, Judy Hong says, “Tobacco valuations are "at a 10-year trough despite a more accommodating market backdrop.”
She sees a floor to cigarettes’ unpopularity, and a stabilization in sales and profits. Continuing, she says, “Expect the current discount on tobacco stocks to narrow as cigarette fundamentals hold up better than feared, contribution from next generation tobacco products builds, and regulatory concerns subside over time.”
Hong says that the bearishness on tobacco traces back to lower sales volumes for cigarettes along with up-front costs of the shift to e-cigs and other alternative products. However, she adds, “Expect the decline in cigarette consumption to abate and the shift to e-cigarettes to moderate. And international cigarette volume trends have been mostly stable.” In line with her bullish stance on the industry, Hong gives PM a solid buy rating.
Bonnie Herzog, of Wells Fargo, agrees with Hong on the outlook for Philip Morris. She bases her optimism, however, on a successful move toward alternative tobacco products, specifically the iQOS heat-not-burn option. Writing of PM, she says she expects the company to beat the Q2 earnings estimate, saying, “We expect PM will beat conservative EPS of $1.32 (vs our $1.36) and we expect: (1) sequential acceleration of iQOS shipment volume in Japan (+14.5%) given strength from next generation iQOS 3/Multi platforms; (2) iQOS to lead heat-not-burn (HNB) category growth in Japan and gain market share elsewhere; and (3) strong cigarette price realization.”
Herzog gives PM a price target of $100, suggesting an upside potential of 22% to the stock. Her rating suggests that PM has more room for growth than the conventional wisdom would indicate – PM’s average price target is $93, indicating a possible upside of 15% from the share price of $81.
PM’s analyst consensus rating is a moderate buy, derived from 7 buys and 3 holds in the last three months.
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