Dividend stocks appeal to investors looking for income, and many people are drawn to the stocks that have highest dividend yields. Yet you have to be careful before getting into a situation with a high-yielding stock that can burn you. Sticking with high-quality, blue chip names can be a smart way to avoid the dangers of high-yield stocks, and that's why you'll definitely want to consider Target (TGT -0.54%), General Motors (GM 1.20%), and Realty Income (O 0.24%).
Aim for the Target
Target has a lot to offer investors who look for both dividends and value. The big-box retailer current trades at just 12 times its earnings over the past 12 months, and the decline in its stock price has boosted its dividend yield to 4.1%. Yet don't let the recent past fool you -- Target has been a favorite among dividend investors for decades. The company has boosted its dividends every single year for 49 straight years, and Target's most recent dividend increase last summer amounted to 7%.
Image source: Target.
Target has struggled along with many retailers lately, and investors have been nervous about its ability to keep up with internet retailers that don't have the brick-and-mortar challenges and costs that Target and its peers have. Yet Target is trying to turn itself around, turning to aggressive moves like price-cutting, delivery, smaller store formats, and digital sales. Times are tough for retail, but Target's combination of value and style-consciousness has appealed to shoppers in the past and should continue to do so going forward.
General Motors drives forward
For dividend investors, General Motors has gone from zero to hero in a short period of time, emerging from bankruptcy in the aftermath of the financial crisis. It only took a few years for General Motors to start paying a dividend, and in subsequent years, increases to the payout have brought GM's dividend yield all the way up to 4.4%. Even at that level, GM is only paying out about a quarter of its earnings as dividends, which some see as a potential catalyst for further increases in the future.
General Motors has been an underappreciated stock since its 2010 re-emergence into the public markets, with share-price gains failing to reflect the huge growth in car sales that spurred record results in 2015 and 2016. Now, investors are anticipating the end of that favorable cycle for the auto industry, and that has led to concerns about the sustainability of GM earnings going forward. Yet even allowing for reasonable assumptions about a potential earnings decline, General Motors has a lot of margin for safety, with the stock currently trading at less than six times trailing earnings. That combination of dividends and value is hard to find, but it's giving some GM shareholders confidence in its long-term prospects.
Get monthly income
The real estate market has historically been a good source of potential income for investors, and the rise in popularity of real estate investment trusts at the turn of the millennium helped to give mainstream investors an entry point into investing in commercial property. Realty Income has been in the business for decades, and its primary claim to fame is the fact that it makes monthly dividend payments. The REIT counts 562 consecutive monthly payments dating back almost half a century, and its 4.6% dividend yield reflects regular increases on a quarterly basis that extend back nearly 20 years.
Some fear that Realty Income's focus on retail commercial property could get it in trouble, citing the same factors that have hurt retailers like Target as potentially putting the REIT's tenants into financial distress. However, Realty Income's tenants span a diverse cross-section of the retail world, ranging from grocery stores and wholesale clubs to drug stores, convenience stores, and health and fitness clubs. With geographical diversification across the nation, Realty Income is well-positioned to weather challenges to certain sectors of the retail industry.
High-yield dividend stocks are vital for income investors, but you can't afford to settle for low-quality stocks that will cut their payouts and leave you high and dry. By focusing on more stable prospects, you'll boost your chances of finding long-term winners that will provide the income and growth you need.
