While the S&P 500 sports a dividend yield barely above 2%, there are plenty of stocks that pay investors a much nicer 4% yield. Stocks with high dividend yields sometimes come with big risks, but that's not always the case.
Three of our Motley Fool contributors think AT&T (NYSE: T), Magellan Midstream Partners (NYSE: MMP), and International Business Machines (NYSE: IBM) are great options for dividend investors looking for dividend yields over 4%. Here's why.
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A growth spurt is right around the corner for this top-tier high-yield stock
I know what you're probably thinking, and you're absolutely right -- AT&T is boring, and in recent years, it hasn't delivered a lot of top-line sales growth. But the thing is, sometimes boring is beautiful, because it means you're invested in a time-tested business model that you won't have to worry about. Of course, there's more to like about AT&T than simply its brand and the fact that you'll sleep well at night. What's intriguing is that its growth rate might be about to pick up in a big way.
Beginning last year, we saw the first real ramp-up of 5G networks being tested in select cities by major wireless carriers, including AT&T. This next-generation wireless network is likely going to lead to a tech upgrade cycle, with consumers eager to take advantage of 5G speeds. That's good news for smartphone manufacturers, but it's even better news for wireless carriers like AT&T. Data is a high-margin source of revenue, and the rollout of 5G on a broader basis in 2020 and beyond could push the needle north on the company's sales and profitability.
Also, AT&T's acquisition of Time Warner could work better than most folks anticipate. Sure, I may be a bit biased saying that as an AT&T shareholder, but the addition of the CNN, TNT, and TBS networks has a twofold purpose. First, it puts more bargaining power in AT&T's court when negotiating rates with advertisers. Secondly, it's a dangling carrot of sorts that can be used to attract consumers to AT&T's video streaming services.
The recipe exists for AT&T to grow organically by a mid-single-digit percentage. Coupled with a forward price-to-earnings ratio that's as low as it's been in a decade, AT&T looks to be a top high-yield stock you can count on.
Selling at a discount to its peers is rare for Magellan
Tyler Crowe (Magellan Midstream Partners): For years, Magellan Midstream Partners has been regarded as one of the best-run oil and gas pipeline businesses out there, and its stock has historically traded at a premium to its peers because of its ability to generate great returns and pay a generous distribution to its investors. Recently, though, the stock has been hit harder than several others in this business, and now its stock trades at a discount to its peers for the first time since its IPO back in 2004.
One reason investors may be souring on this high-yield stock is the fact that management has made the deliberate decision to slow the rate at which it grows its payout. Magellan has grown its payout at a compounded annual rate of 12% since it went public, but management is currently targeting payout growth in the 5% to 8% range over the next couple of years.
This isn't a sign of weakness, though. Rather, management sees immense opportunities to grow the business over the next few years. To meet the company's funding needs, management wants to retain more operating cash flow rather than rely on issuing debt or equity to meet its funding needs. By taking proactive steps today to fund future growth, the company is ensuring that it will be able to keep those payments going for years to come without compromising its financial strength.
The stock's decline and the valuation Wall Street has assigned Magellan's stock seem like a gross overreaction to a move that will secure its long-term future. That's why investors willing to look past a few quarters of tepid payout growth should seriously consider Magellan Midstream Partners today.
A big tech dividend
Tim Green (International Business Machines): Shares of IBM have surged since the company reported better-than-expected results in January, but the stock is still down sharply from its multiyear high. Since peaking in early 2013, IBM has lost nearly 40% of its value.
IBM's dividend yield was nearing 6% in late December as the stock was bottoming out. The yield today is not quite as high, clocking in at about 4.7%, but that's still well above typical levels for the stock, and still more than double the yield of the S&P 500.
IBM stock has been beaten down because its efforts to reinvent itself have been slow to show progress. Revenue began growing in late 2017 after years of declines, but that growth was short lived. The company's growth businesses, which include cloud computing and artificial intelligence, now account for around half of total revenue. But slumping sales in legacy businesses, as well as an aging mainframe product cycle, have been offsetting that growth.
Despite the revenue problems, IBM remains a highly profitable and deeply entrenched company. It expects to earn at least $13.90 in per-share adjusted earnings this year, up slightly from 2018, along with free cash flow of around $12 billion. Many industries depend on the company's products and services, and IBM has relationships with customers that span decades. It's able to sign massive, multiyear, multitechnology deals for a reason.
IBM still has work to do. It needs to return to sustainable growth, and it needs to make its $34 billion acquisition of Red Hat work. Neither is guaranteed. But for dividend investors looking for a high yield and a beaten-down valuation, IBM is a great choice.
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Sean Williams owns shares of AT&T. Timothy Green owns shares of AT&T and IBM. Tyler Crowe owns shares of Magellan Midstream Partners. The Motley Fool recommends Magellan Midstream Partners. The Motley Fool has a disclosure policy.