Please ensure Javascript is enabled for purposes of website accessibility

3 High-Yield Dividend Stocks You Definitely Want to Consider

By Leo Sun - Feb 11, 2017 at 9:59AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Qualcomm, Verizon, and China Mobile offer solid yields at low valuations.

Many high-yield dividend stocks are now trading at a premium to the market and their industry peers, due to the multi-year bull market and low interest rates inflating demand for income stocks. But with interest rates set to rise this year, investors should be wary of dividend stocks that have historically low yields and historically high valuations.

It might seem tough to find undervalued stocks with high yields in this frothy market. So in this article, I'll highlight three stocks that still trade at discounts to their industry peers while offering yields higher than 3% -- Qualcomm (QCOM 3.65%), Verizon (VZ 0.80%), and China Mobile (CHL).

Investors can still find decent dividend stocks at low valuations in today's frothy market.

Image source: Getty Images.

Qualcomm

Shares of Qualcomm, the biggest mobile chipmaker in the world, have fallen nearly 20% since the beginning of 2017 due to an FTC lawsuit regarding the company's licensing practices, several related lawsuits from longtime customer Apple (AAPL 4.08%), and mixed first quarter earnings.

The main bear case against Qualcomm is that its core business model -- which uses a high-margin portfolio of patents to support its lower-margin chip business -- could be crippled if it's forced to lower its licensing fees, which many OEMs and regulators claim are too high. Qualcomm's chip business would continue losing market share to cheaper chipmakers like MediaTek and first-party chipmakers like Apple and Huawei. To top it off, the probes and lawsuits could derail its proposed takeover of NXP Semiconductors (NXPI 1.71%), which would make it the largest automotive chipmaker in the world.

Meanwhile, the bulls believe that a Republican-led FTC will drop the case, Qualcomm will eventually reach a settlement with Apple, and the NXP deal can still clear its regulatory hurdles.

Regardless of the outcome, the steep sell-off has made Qualcomm shares fundamentally cheap at 14 times earnings -- which is much lower than its industry average of 22. Qualcomm has hiked its dividend annually for 14 straight years, and currently pays a forward yield of 4% -- which is comfortably supported by its payout ratio of 63%.

Verizon

Shares of Verizon have slipped 10% since the beginning of the year, due to a mixed first quarter earnings report, a (recently dropped) FCC probe of its zero-rating strategies, and uncertainties regarding its planned acquisition of Yahoo's internet business and rumored interest in Charter Communications. All those question marks made Verizon look riskier than its primary rival AT&T (T -0.14%), which dipped just 3% this year.

But that fear also made Verizon a value play at 14 times earnings, which compares favorably to AT&T's P/E of 17 and the industry average of 25 for domestic telcos. The company has also raised its dividend annually for a decade, and currently pays a forward yield of 4.8% -- which matches AT&T's yield. Verizon's payout ratio of 66% also gives it plenty of room for dividend hikes in the future.

Regardless of questions surrounding Verizon's near-term moves, the telco remains the largest wireless carrier in the U.S., and won't likely lose that title anytime soon. Analysts expect Verizon's revenue and earnings growth to remain nearly flat this year, but the company's low valuation, high yield, wide moat, and expanding digital ecosystem still make it an ideal income play for conservative investors.

China Mobile

Investors looking for an overseas domestic telco might consider buying China Mobile, the biggest wireless carrier in China (and the whole world). The carrier had 849 million customers at the end of 2016, and a large number of its 2G and 3G users upgraded to higher revenue 4G plans throughout the year. It also has a small but growing wireline business with 79 million customers, which could eventually enable it to launch more comprehensive digital bundles like AT&T and Verizon.

China Mobile is one of three state-owned telcos in China. The Chinese government sometimes rotates its management with that of its two peers -- China Telecom and China Unicom -- to ensure healthy competition between the three players. This prevents China Mobile from ever becoming a monopoly, but it gives it a comfortable safety net which limits its downside during market declines.

China Mobile has a trailing yield of 3.1%, which is supported by a payout ratio of 42%. Its forward yield is uncertain, since it adjusts the payment every year based on its earnings, but its yield has stayed between 3% to 5% over the past five years. Its semi-annual yield might not appeal to income investors looking for quarterly payments, but China Mobile's trailing P/E of 15 makes it a solid value play compared to other foreign telcos, which have an industry average of 18.

The key takeaway

Qualcomm, Verizon, and China Mobile all have wide moats, low valuations, and high dividends. Their near-term growth might seem glacial, but I believe that they all have less downside potential than other income plays, which are trading at premiums to the market -- which makes them solid long-term plays at current prices.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
VZ
$51.40 (0.80%) $0.41
QUALCOMM Incorporated Stock Quote
QUALCOMM Incorporated
QCOM
$139.76 (3.65%) $4.92
China Mobile Limited Stock Quote
China Mobile Limited
CHL
Apple Inc. Stock Quote
Apple Inc.
AAPL
$149.64 (4.08%) $5.86
AT&T Inc. Stock Quote
AT&T Inc.
T
$21.29 (-0.14%) $0.03
NXP Semiconductors N.V. Stock Quote
NXP Semiconductors N.V.
NXPI
$195.93 (1.71%) $3.30
China Unicom (Hong Kong) Limited Stock Quote
China Unicom (Hong Kong) Limited
CHU
China Telecom Corporation Limited Stock Quote
China Telecom Corporation Limited
CHA

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
344%
 
S&P 500 Returns
120%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.