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Companies that are growing fast generally pay lackluster dividends, or no dividends at all. While these investments offer the potential for substantial capital appreciation in the long run, investors with plenty of savings already should consider buying stocks that pay attractive dividends. This allows those savings to generate even more cash, not just paper gains.
We asked three of our contributors to each suggest a high-yield dividend stock that would be perfect for wealthy investors. Here's why Qualcomm (QCOM 1.41%), AbbVie (ABBV -1.03%), and Brookfield Infrastructure Partners L.P. (BIP -0.47%) are great choices.
A solid tech dividend
Tim Green (Qualcomm): The ongoing slowdown in the smartphone market is a problem for Qualcomm. The company makes most of its profits through licensing deals, with mobile device unit volume being a major driver of growth. The company also sells chips, including its Snapdragon line of systems on a chip. This wasn't a great year for Qualcomm, with licensing revenue slumping 4% and chip revenue tumbling 10%. But the company expects a return to revenue growth next year.
Qualcomm stock sports a dividend yield of about 3.1% -- not the highest in the world, but substantially better than the S&P 500's measly 2% payout. About 56% of Qualcomm's earnings in fiscal 2016 went toward paying the dividend, a payout ratio that the company probably doesn't want to go much higher. Earnings growth will probably determine dividend growth going forward.
The good news is that Qualcomm is making a big bet on a growth area that could free it from its dependence on mobile devices. The company plans to acquire NXP Semiconductors in a deal valued at $47 billion, including debt. NXP is the leading supplier of automotive semiconductor chips, giving Qualcomm an instant presence in an industry that could see explosive growth going forward as cars become smarter and more connected.
With Qualcomm, investors get an above-average dividend yield coupled with growth opportunities that will help drive that dividend higher in the future.
This dividend aristocrat is worth the risk
George Budwell (AbbVie): AbbVie is a dividend aristocrat by virtue of being spun off from large-cap healthcare behemoth Abbott Laboratories in 2013. However, the drugmaker has continued Abbott's rich tradition of regularly upping its dividend rewards program, resulting in an outstanding yield of 4.1% at current levels.
Now, the main risk factor at play here is that AbbVie's main growth driver, Humira, is set to lose patent protection in the U.S. at the end of the year, potentially opening the door for biosimilar, or copycat, versions of this top-selling anti-inflammatory drug to enter the market. Although investors are apparently deeply concerned about this issue based on the fact that AbbVie sports a rock-bottom forward price-to-earnings ratio of around 11, the facts on the ground tell an entirely different story.
The heart of the matter is that biosimilars are simply not a major threat to biological drugs in the U.S. at the moment. The current state of the legal and regulatory landscapes, after all, gives drugmakers like AbbVie a number of ways to defend their products from biosimilars for extend periods of time. In fact, AbbVie's management is fairly confident that a biosimilar for Humira won't become a real concern until at least 2022. By then, the drugmaker should be able to flesh out its late-stage clinical pipeline to become less reliant on Humira for growth.
In all, AbbVie is an exceedingly cheap dividend aristocrat because of the arguably overblown concerns regarding Humira's patent expiration -- perhaps making it a compelling biotech stock to buy right now.
Owning cash-cow infrastructure assets can pay off big
Jason Hall (Brookfield Infrastructure Partners L.P.): If you're looking for a strong income stream that's likely to grow for years to come, Brookfield Infrastructure Partners could be an ideal choice. The partnership, which is managed by Brookfield Asset Management, has a strong history of increasing payouts:
BIP Dividend data by YCharts
And considering the kinds of assets Brookfield Infrastructure specializes in -- namely large, expensive infrastructure such as toll roads, power transmission lines, gas pipelines, and ports, among others -- there's a lot of reason to expect this history of boosting payouts to continue. Brookfield Infrastructure's operations, which are diverse across industry and geography, almost always have very high barriers to competitive entry, almost always generate steady cash flows, and in many cases are the only asset of that kind serving the market it operates in.
The biggest risk with Brookfield Infrastructure is largely that it uses debt and share offerings to fund expansion. Historically, management has done an excellent job using the capital from debt and dilution to generate higher per-share cash flows, growing both the share price and dividend payout, and I have faith in its ability to continue doing so. But any slip-ups in what has been a great history of successful expansion could harm future dividend growth. And while that risk isn't necessarily high, investors shouldn't ignore it out of hand.
If you bought shares today, you'd capture a 4.8% yield based on the current prices and the $0.39-per-share quarterly dividend. Even with the risk of capital expenditures going forward not generating the strong returns of past growth investments, the odds are better than even that Brookfield Infrastructure will continue to be an excellent high-yield investment for years to come.
