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3 High-Yield Stocks at Rock-Bottom Prices

Keith Noonan, Chuck Saletta, and Danny Vena, The Motley Fool

Selecting the best high-yield stocks from the bargain bin tends to involve a balancing act. Companies that offer big dividends and trade at low earnings multiples often do so because their underlying businesses face challenges that stand in the way of sustainable earnings growth -- setting up situations in which investors might be tempted into buying businesses that fall short as long-term investments. 

While the reality of that dynamic should be kept in mind, it's also true that buying the right dividend stocks at the right prices is one of the most reliable ways to power your portfolio to market-beating returns. In pursuit of that goal, we asked a panel of Motley Fool investors to identify three high-yield stocks that offer compelling value at today's prices. Read on to learn why they picked Omega Healthcare Investors (NYSE: OHI), Verizon Wireless (NYSE: VZ), and GameStop (NYSE: GME).

The word Yield spelled out on five stacks of coins, ascending in size from right to left.

Image source: Getty Images.

A rare opportunity to combine growth, yield, and valuation

Chuck Saletta (Omega Healthcare Investors): America's population is aging, and at the same time we're living longer, we're generally having fewer children. This combination of factors bodes well for the long-term future of companies dedicated to caring for seniors when they're no longer able to care for themselves. After all, the deeper into retirement we get, the more likely it is we'll need help, and with fewer children to care for us, the more likely we'll need to seek professionals to provide it.

That's where Omega Healthcare Investors looks capable of shining. As an equity real estate investment trust (REIT) that focuses on skilled nursing and assisted-living facilities, it's well-positioned to take advantage of those demographic trends. As it's structured as a REIT, it's required to pay out at least 90% of its earnings as a dividend, virtually assuring a high yield. In fact, at its recent price of $26.78 per share, its dividend represents a yield north of 9%. 

Perhaps even better for patient investors, Omega Healthcare Investors' stock is available for a mere 14 times trailing earnings and 15 times expected earnings, thanks to a stumble reported in its recent earnings announcement. Due to impairment charges associated with one of its customers not paying its rent, the company's stock took a tumble near the end of October, making it available at that reasonable valuation.

Despite that short-term hit, Omega Healthcare Investors is expected to grow earnings by around 15% annualized over the next five years. That gives patient investors the rare opportunity to own a company with both a high yield and a decent expected growth rate at what looks like a rock-bottom price.

This is an easy call

Danny Vena (Verizon Communications): Verizon Wireless is the nation's largest carrier by subscribers, but shares in the company have been dead money so far this year, falling 5% as of this writing. The culprit? A combination of stiff competition and falling video subscribers has some investors wondering what the future holds for the telecom giant.

In spite of those short-term concerns, there are still reasons to be bullish on Verizon. The company reported a net increase of 603,000 postpaid subscribers last quarter, as consumers took advantage of Verizon's unlimited wireless pricing plans. Additionally, the company more than made up for the loss of 18,000 FiOS video subscribers with the addition of 66,000 new internet subscribers. 

When considering both prepaid and postpaid subscribers, Verizon controlled 44% of the market in the third quarter of 2017, up from 38% in the prior quarter. The company is also building out its fiber network, and trials are ongoing for the rollout of its 5G network, which could debut as early as late 2018. Verizon also plans to cut $10 billion in spending over the next four years, in part, to offset falling prices and the cost of unlimited data plans. 

Verizon stock currently yields 4.6%, while paying out a healthy 59% of profits to fund its dividend. This leaves the company plenty of room for increases in the future. And with Verizon trading for just 13 times trailing earnings, it's now a great time to get a solid dividend at a steep discount.

A discounted retail player

Keith Noonan (GameStop): Shares of specialty retailer GameStop have fallen more than 25% year to date and have shed more than 40% of their value over the last three years. The big valuation declines come as the company faces challenges that necessitate a pivot away from the video game retail business, but there are also characteristics that suggest the stock is a bargain.

One immediately appealing aspect of ownership is GameStop's 7.9% dividend yield. That's a hefty returned-income package, and with shares trading at less than six times forward earnings estimates, prospective investors shouldn't be surprised that there's some trade-off in the risk department.

As video game fans increasingly purchase software through digital channels, GameStop's most important revenue streams appear to be on an irreversible slide -- inviting suggestions that the retailer is on track to become the next Blockbuster. However, at current prices, there's enough promise to justify betting on the company's ability to transform its business.

GameStop's pop-culture merchandise segment is growing quickly, up 26.5% year over year in its October-ended quarter, and delivered comparable margins to its new and used video games segments. Members of the company's rewards program are already spending more on collectibles than on video game products, and it looks like this can be a sustainable growth business for the retailer.

Thanks to momentum for collectibles, mobile and entertainment service packages, and digital sales, the company expects that 50% of its operating income will be derived from sources other than physical game sales by 2019. While GameStop's long-term outlook in the video game industry is troubling, it's also true that the company is coming up on the favorable part of the console hardware cycle -- with new platforms from Sony and Microsoft likely just a couple of years away. GameStop's share-buyback initiative should also create some earnings momentum and help the company sustain its dividend. 

The retailer still has a lot of work ahead in order to successfully transform its business, but I think the stock presents an attractive income play at today's prices.

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Chuck Saletta has the following options: long January 2020 $27 calls on Omega Healthcare Investors, short January 2020 $27 puts on Omega Healthcare Investors, short March 2018 $24 puts on Omega Healthcare Investors, and short March 2018 $30 calls on Omega Healthcare Investors. Danny Vena has no position in any of the stocks mentioned. Keith Noonan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Verizon Communications. The Motley Fool owns shares of GameStop and has the following options: short January 2018 $19 calls on GameStop. The Motley Fool has a disclosure policy.