Despite recent volatility, the stock market remains near all-time highs and generous dividend yields are still relatively hard to find. However, if you look closely, and are willing to take on a little bit of uncertainty, you can find good companies that will pay you well to own them. Two that stand out today are ExxonMobil Corporation (NYSE: XOM) and General Mills, Inc. (NYSE: GIS). If you like dividends, you'll love these two high-yield stocks.
1. The oil giant
Exxon is one of the world's largest integrated oil majors, with operations that span the industry from drilling for oil and gas to processing it into refined products and chemicals. This diversification helps to smooth results over time in the volatile oil space, since falling oil prices are generally a net benefit to the company's downstream refining and chemicals businesses. That helps to offset the pain of oil downturns on the upstream drilling side.
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That's not unique to Exxon, however. Other oil companies have diversified businesses, too. What helps to set Exxon apart is its conservative, long-term approach. For example, debt makes up just 10% or so of its capital structure, the lowest among its major peers. It was able to add leverage during the last oil downturn to support its capital spending plans and continue to raise its dividend each year at a time when other oil companies were cutting dividends or struggling to just hold them steady.
Exxon's streak of annual dividend increases is now up to an incredible 36 consecutive years. The yield, at around 4%, is the highest it's been in decades, too, so now is a good time to consider adding this oil giant to your portfolio. There are reasons for the high yield, notably falling oil production and middling returns on capital employed. But Exxon has a plan to deal with these issues and history suggests, given enough time, it will succeed. Long-term investors can get paid very well to wait for the company to work through this tough patch.
2. The big acquisition
General Mills is one of the world's largest packaged food companies, with iconic brands such as Cheerios and Yoplait. In addition to the well-established brands it controls, the company also has an incredible distribution network that would be difficult for upstart brands to quickly replicate and marketing scale that few can match. And since it sells lots of small, necessity products to a large number of end customers, its business tends to be fairly stable over time.
The dividend has been increased annually for 14 consecutive years and the yield is a robust 4.3%. That's higher than it was during the depths of the 2007 to 2009 recession, which should justifiably elicit a little concern. The reason is threefold. First, consumer tastes have been shifting toward fresh and healthy foods, an issue that General Mills is working through by acquiring on-target brands (Annie's and Larabar, for example) and by reworking older products (new versions of Yoplait, among others). Second, inflation in the supply chain is pressuring margins. The food maker is cutting costs and will, eventually, push through higher prices. The over 100-year-old company has dealt with these problems before and history suggests it will successfully address both issues in time.
The third concern is a bigger issue today -- General Mills just made a very large acquisition, paying $8 billion for high-end pet food maker Blue Buffalo. Investors are worried that it paid too much and that debt will be a drag on performance. That's doubly true because management has stated that it will be holding the line on dividend increases until it reduces debt. Don't get overly worried.
Blue Buffalo will benefit greatly from General Mills' distribution network. Although the price was high, this well-positioned pet food company adds notable growth potential to the food maker's portfolio. Debt levels, meanwhile, aren't actually that as out of whack as you may think. Long-term debt makes up around 67% of the capital structure today, up from roughly 60% before the Blue Buffalo purchase. Not a huge change. Interest expense in the latest quarter was covered by roughly 4.5 times, as well, suggesting that General Mills isn't having troubling carrying the extra leverage. Even if Blue Buffalo doesn't live up to expectations, General Mills should be able to muddle through -- and start to raise its dividend again once it does. In the meantime, patient investors can collect a fat yield.
Not exactly risky
It would be untrue to suggest that buying Exxon and General Mills doesn't involve some uncertainty. Both are, indeed, facing headwinds today. However, the market appears to be exaggerating the risks involved. That gives long-term investors a chance to pick up very high yields from two companies that have proven over time that they know how to reward income investors. Now is the time to take a deep dive into this pair of high-yield stocks.
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