Low interest rates and a dovish outlook from the Federal Reserve have made things tough for income investors these days. Bond yields are down, which has caused investors to turn to stocks, but that's only pushed up stock valuations and lifted the market to an all-time high. With rising prices, dividend yields have come down, and today, the S&P 500 has a dividend yield of just 1.9%.
Finding high-yield stocks may not be as easy as it used to be, but our contributors have got you covered. Keep reading to see why they recommend Tanger Factory Outlets (NYSE: SKT), Duke Energy (NYSE: DUK), and Nordstrom (NYSE: JWN).
Buying from the bargain bin
Jason Hall (Tanger Factory Outlets): Over the past three years, shares of Tanger have lost more than 60% of their value on the weakening results at some of its outlet malls, but also general fears that it -- like plenty of other mall operators -- was at serious risk from the "retail apocalypse."
And while e-commerce is certainly having a pronounced effect on retail, causing thousands of stores to close and leaving lots of mall real estate investment trusts (REITS) with empty properties, Tanger has struggled far less than Mr. Market's treatment of its stock would have you believe. While its share price has plummeted during the past three years, the company has actually increased its dividend by nearly 10%:
That's pushed the dividend yield up to an incredible 8.7% at recent prices. Moreover, it's a payout that can easily be sustained: Its cash payout ratio was 54.5% over the past four quarters.
Tanger's management is taking action to strengthen the business. It's selling off its weakest properties and using the proceeds to improve its balance sheet, while focusing on improving ones with the best traffic and occupancy rates.
Lastly, Tanger's business focus has a lot going in its favor. As much as e-commerce is growing and taking share from brick-and-mortar stores, discount outlets remain very popular and are generally operated by companies with an omnichannel strategy that ties together e-commerce and physical retail. Moreover, Tanger's focus on outdoor malls means lower operating costs and more easily filled properties when they do become vacant.
Yes, there's some risk here. But my analysis leads me to believe that investors who buy Tanger with a plan to hold for the long term should enjoy both strong income from the high yield and appreciation of the stock value as Mr. Market realizes Tanger's improvement plan is working.
This time-tested dividend stock will "power" your portfolio
Sean Williams (Duke Energy): When looking for top-tier but incredibly safe income stocks, one of the best sectors to consider is utilities. And within utilities, Duke Energy and its 4.2% yield give investors the stability they're looking for with a 4%-plus-yielding dividend stock.
Duke Energy's business model could aptly be described as "boring," but when you're after income and want to sleep well at night, that's a welcome six-letter word. Duke's electric and gas utility operations have more than 50 gigawatts of generating capacity and serve an estimated 9.3 million people across seven states. These industries are regulated, which means that Duke can't just raise rates on a whim.
On the plus side, however, its cash flow is highly predictable. Being able to predict its cash flow ensures that Duke can reinvest in modernizing its existing grid, expanding its natural gas infrastructure, and adding to its renewable energy portfolio without breaking the bank or having surprises pop up along the way.
Speaking of surprises, the recent decline in U.S. Treasury yields portends potentially good news on the horizon for Duke. With the Federal Reserve expected by Wall Street to reduce rates a couple of times in the next couple of quarters, utilities like Duke that lean heavily on debt to fund some of these aforementioned expansion projects can do so at a lower cost.
Duke Energy's investment in renewable sources of energy, such as wind and solar, should also be a long-term boon. Though these projects might appear costly now, solar and wind are expected to significantly drive down the company's costs and lift margins. Currently boasting 3 gigawatts of wind and solar capacity, Duke plans to invest $2.5 billion into new commercial renewable projects between 2019 and 2023, with 700 megawatts alone of solar expected to come online in Florida by 2021.
Utility growth isn't jaw-dropping by any means, but Duke Energy offers a way to nab a 4.2% yield with 4% to 6% sustainable earnings-per-share growth each year. That type of stability is hard to come by in the investing world.
A bargain price for a great brand
Jeremy Bowman (Nordstrom): By almost any conventional measure, Nordstrom, the high-end department-store chain, looks like a bargain. The stock is trading at a five-year low near $32 after a proposed buyout by the founding family at $50 a share was rejected last year. On a price-to-earnings (P/E) basis, the stock is valued at less than 10 as it fell after a disappointing first-quarter report.
However, the recent pullback has set up an opportunity for dividend investors, as Nordstrom's yield has surged to 4.7%. Many of the company's recent headwinds seem temporary and should lift by the end of the year.
Nordstrom is set to open its flagship women's store in Manhattan later this year, which is expected to become its busiest location, singlehandedly growing annual revenue by 2%-3%. Meanwhile, the company is also expanding its Nordstrom Local footprint, its no-inventory, service-focused hubs, adding new locations in Manhattan, which should help boost online sales in the area. Those two moves should complement each other well as the New York market is already the company's biggest for online sales, though it has been historically underserved by physical locations.
Though Nordstrom's full-line department stores have mostly seen sales decline in recent years, as much of the department-store sector has struggled, the company has built a strong e-commerce business with 31% of its sales now coming from the online channel. Nordstrom has also developed an impressive off-price division in Nordstrom Rack, making it a much more well-rounded retailer than the average department-store chain.
Finally, Nordstrom has been steadily buying back stock, and its repurchase program should be able to take advantage of the recent sell-off.
The company expects financial results to improve in the second half of the year as it completes a heavy investment cycle across several initiatives including Canada, Trunk Club, Nordstromrack.com, and New York. As a result, investors have an opportunistic chance to capture a near 5% yield on a stock that could easily recover its recent losses, gaining 25% or more.
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Jason Hall owns shares of Tanger Factory Outlet Centers. Jeremy Bowman owns shares of Nordstrom. Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends Nordstrom and Tanger Factory Outlet Centers. The Motley Fool has a disclosure policy.