Image source: Getty Images.
When it comes to buying stocks with high dividend yields, there's always the risk the dividend gets cut. What's more, a dividend cut can trigger a major decline in the stock price, making a bad situation even worse for investors. There are plenty of stocks available that offer high dividend yields, but dividend safety is just as important as yield. Here are three stocks with yields above 4% that investors should consider.
Staples
Office supply company Staples (SPLS) is now on its own after its planned merger with Office Depot was shot down by regulators. The stock slumped on that news, pushing the dividend yield up to about 5.4%.
There is a tremendous amount of pessimism surrounding Staples. The company's retail stores are performing poorly, and it's closing them in droves in an effort to improve profitability. Revenue is declining, profit is declining, and the ever-present threat from online retailers creates quite a bit of uncertainly regarding Staples' future.
But the company's commercial business, where contracts are signed with large organizations to deliver office supplies and other products, is performing well. During Staples' first quarter, the North American commercial business grew sales slightly and improved its operating margin by 63 basis points year over year. Gaining a foothold in this business will be tough, although certainly not impossible, for online retailers like Amazon, given that's it's very different from selling to consumers.
Staples expects to generate about $600 million of free cash flow this year, putting the payout ratio based on this number at about 52%. I wouldn't expect any dividend growth from Staples in the foreseeable future, but the situation would have to get quite a bit worse for the dividend to be in danger. For investors willing to go against the herd, Staples is a dividend stock to consider.
General Motors
Automaker General Motors (GM 0.69%) is a textbook example of an unloved stock. The stock trades for a single-digit multiple of earnings despite strong signs of progress in recent years. The company's profitability has improved, driven in part by strong demand for automobiles in the United States. GM expects to report adjusted earnings between $5.25 and $5.75 per share in 2016, putting the forward PE ratio right around 5. The dividend yield is about 5.15%.
There are legitimate concerns about GM that are worth mentioning. The automobile market in the U.S. has been strong in recent years, and that's helped buoy GM's results. But there's a chance the market will peak sometime soon, and that makes GM's earnings outlook a lot murkier. The company is in a far better financial position compared to the old GM, but it's hard to say how the company will perform in a weak demand environment.
The market is betting that GM's impressive earnings won't last, and it might be right. But the company's payout ratio based on the midpoint of its earnings guidance for this year is only 28%. Earnings would need to fall substantially before GM would be forced to cut its dividend. As long as weak demand doesn't plunge GM into the red, the stock looks like a good bet for dividend investors.
Macy's
Department store Macy's (M 2.05%) is going through a major rough patch. Sales are in decline, margins are contracting, and broad weakness in the entire department store sector is only making things worse. During the first quarter, Macy's reported a 5.6% year-over-year decline in comparable sales and a 40% drop in net income.
The stock has plummeted over the past year as Macy's performance degraded, pushing the dividend yield up to 4.4%. Macy's expects its earnings to decline this year, with guidance calling for adjusted EPS between $3.15 and $3.40, down from $3.77 in 2015. But even at the midpoint of this lower guidance, Macy's payout ratio is still just 44%. Like the other two stocks I talked about above, things would have to get much worse at Macy's before the dividend would be at risk.
How long it will take Macy's to right the ship is an open question. So far, there has been little evidence that its turnaround strategy is working. But Macy's is still profitable enough to easily maintain its dividend payments, and the high yield gives investors a good reason to stick with the stock.
