Most income investors are naturally drawn to the stocks that offer up high yields. That's understandable, but oftentimes, a market-topping yield can be a sign that a business is in trouble. For that reason, investors need to be picky about which dividend stocks they choose to buy.
To aid you in your search, we asked a team of Fools to share a high-yield stock they think is a great buy-and-hold candidate. Read on to see why they highlighted Philip Morris International (PM 0.68%), Brookfield Property Partners (BPY), Pfizer (PFE -0.12%), NextEra Energy Partners (NEP -1.13%).
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Transforming the tobacco industry
Dan Caplinger (Philip Morris International): The tobacco industry is famous for providing strong dividend yields over the years, and Philip Morris International is currently near the top of the industry with its 4.1% yield. Moreover, Philip Morris has put together an impressive run of dividend growth over its short history as an independent, publicly traded company, boasting nine straight dividend increases that have boosted its quarterly payout by more than 125% since 2008.
Over the past couple of years, Philip Morris has run into some headwinds from the strength of the U.S. dollar. Because Philip Morris gets all of its revenue and profit from international tobacco markets, weakness in foreign currencies means Philip Morris' financial results take a hit when it has to translate those foreign revenues into U.S. dollars for reporting purposes. Yet more recently, the downward impact of the strong dollar on Philip Morris' numbers has lessened somewhat, and investors hope the worst of the currency pain for the tobacco giant could be over.
More importantly, Philip Morris sees plenty of potential for growth ahead. Its iQOS heat-not-burn alternative to traditional cigarettes has had early success in test markets like Japan, and the company applied for approval from the U.S. Food and Drug Administration for iQOS as a reduced-risk tobacco product. If that moves forward, it could transform the industry -- and leave Philip Morris as a leader in a burgeoning new market that it thinks could completely replace regular cigarettes in time.
This big pharma has it all
Brian Feroldi (Pfizer): After years of reporting falling sales thanks to the loss of patent exclusivity on its megablockbuster drug Lipitor, pharma giant Pfizer is officially back on track. Revenue has been ticking higher for several quarters in a row now thanks to strong market demand for several of the company's new drugs. In fact, the company is posting double-digit growth in drugs such as anticoagulant Eliquis, rheumatoid arthritis drug Xeljanz, and cancer drug Ibrance. When added to the dependable sales of its legacy product portfolio, it's no wonder this company has been doing well again.
Looking ahead, Pfizer's investors have plenty of reasons to believe the growth can continue. The company's newly launched biosimilar drug Inflectra is off to a decent start and is poised to rapidly steal market share away from Johnson & Johnson's Remicade. The company's recent acquisitions of Anacor Pharmaceuticals and Medivation should help drive the company's top line higher, too.
Despite all of this potential, Pfizer's stock is trading for less than 12 times forward earnings. Add in a market-thumping yield of 4%, and I think Pfizer is a high-yield stock that should appeal to any investor who wants to sleep well at night.
Let this real estate mogul do the work for you
Matt DiLallo (Brookfield Property Partners): There's an allure to investing in real estate because it allows investors to generate passive income. In theory, the only work you need to do is take the rent checks from your mailbox to the bank. Of course, those who've owned rental properties know there's much more work involved.
However, there is an easier way to collect truly passive income from real estate, which is investing in publicly traded real property owners such as REITs or partnerships. The best of the bunch, in my opinion, is Brookfield Property Partners. The real estate partnership owns some of the best retail and office properties around the globe, which supply it with steady cash flow that it distributes back to investors. Currently, investors can collect a more than 5% yield after the company increased its payout 5.4% for 2017.
That payout is as safe as they come. As of the end of last year, occupancy across Brookfield Property Partners' core office portfolio was 92.3% and an even healthier 96.5% in its retail portfolio. Not only do most of its leases extend for several years, but these are premier assets that draw tenants. That's why rents for new office leases were up 14% last year while net operating income across its retail properties grew 5%. Further strengthening its financial situation is an investment-grade credit rating and the fact that the company paid out just 82% of cash flow. Brookfield uses that excess cash flow to repurchase units, redevelop older properties, and build new ones, which should push cash flow per unit up 5% to 9% annually over the long term.
In other words, you can literally just sit back and enjoy the growing stream of passive income Brookfield Property Partners will provide for years to come.
A yieldco worthy of your attention
Travis Hoium (NextEra Energy Partners): If you're a dividend investor and you're not yet aware of the amazing dividend power of yieldcos, then NextEra Energy Partners is worth a look. The company owns renewable energy assets across the country that have long-term contracts to sell energy to utilities. These are highly predictable cash flows, and most of the cash is returned in the form of a dividend, which currently yields 4.5%.
The great thing about NextEra Energy Partners is that it will be able to grow its dividend over the long term. Assets will be dropped down from NextEra Energy, or acquired on the open market and funded through the issuance of newly shares and debt. As long as the return on the acquired assets is higher than the cost of funding (dividend and interest cost) the projects will be accretive and will add to the dividend.
Another bonus is that dividends are actually a return of capital early in the yieldco's life, so investors don't have to pay taxes immediately on the cash flow, like they would with typical dividends. Given the long-term contracted cash flows, opportunities for growth, and the ability to avoid taxes, this is a dividend stock all investors should be excited about.
