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3 Stocks to Buy With Dividends Yielding More Than 3%

By Timothy Green - Apr 10, 2017 at 5:53PM

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These stocks are riskier than simply buying an index fund, but a 50% jump in yield is worth the risk.

With the S&P 500 yielding less than 2%, dividend investors wanting more than that paltry payout can look to individual stocks for better yields. All dividend stocks aren't created equal, though, so investors should be picky. A high yield often comes with risks, and the last thing any dividend investor wants is for a dividend cut to both slash their income and drive down the value of a holding.

For dividend investors wanting a solid yield, Nordstrom (JWN 0.54%), International Business Machines (IBM 1.11%), and Garmin (GRMN 1.42%) look like solid choices. None is risk-free, particularly Nordstrom, which is in an extremely competitive industry. But all three offer dividend yields above 3% and a least a few reasons to be optimistic about the company.

A roll of $100 dollar bills and a piece of paper that says "Dividends."

Image source: Getty Images.

A beaten-down department store

The department store industry is being hit with slumping sales and falling profits, but Nordstrom looks like the best of the bunch. The company managed to grow sales during 2016 thanks to both new store openings and strong performance at its off-price Nordstrom Rack locations, although weakness at the full-line stores led to a slight drop in comparable sales.

The growth plan for 2017 is to focus on expanding the Nordstrom Rack brand, with 15 new locations planned. Nordstrom expects this to drive a 3%-4% sales increase, with roughly flat comparable sales. Nordstrom Rack put up solid numbers in the fourth quarter of last year, posting comparable-sales growth of 4.3%, so the push to grow the value-oriented chain make a lot of sense.

Nordstrom pays a $0.37-per-share quarterly dividend, which puts the dividend yield at about 3.3%. Based on the midpoint of Nordstrom's adjusted earnings guidance range for 2017, the payout ratio sits right around 51%. The company's earnings are being pressured by a competitive environment, so dividend growth may be sluggish going forward. But the company's small size relative to larger department store chains like Macy's and the success it's having with Nordstrom Rack should help it ride out the current shake-up in the department store industry.

A tech turnaround that has finally arrived

With a dividend yield of 3.25%, IBM is still an attractive dividend stock even after a 20% surge in 2016. The century-old tech giant has been undergoing a transformation over the past few years, intensifying its focus on areas like cloud computing, analytics, and security while shedding less-profitable businesses. After years of revenue and earnings declines, IBM expects its adjusted per-share earnings to increase in 2017, with its turnaround efforts finally flowing through to the bottom line.

The IBM logo.

Image source: IBM.

IBM should be announcing its next dividend payment later this month, which in all likelihood will make 2017 the 22nd year in a row that IBM has increased its dividend. The current quarterly dividend of $1.40 per share represents a payout ratio of just 40.6% based on IBM's earnings guidance for 2017, low enough that dividend growth can outpace earnings growth going forward.

There's a lot going right at IBM, even as total revenue remains stuck in place. The cloud computing business surged 35% in 2016 to $13.5 billion, with cloud as a service now at an annual revenue run rate of $8.6 billion, up 61% year over year. IBM's strategic imperatives, which include cloud computing and IBM's other growth businesses, now account for 41% of total revenue, growing by 13% last year. With earnings growth set to return this year, IBM's streak of raising its dividend should continue for the foreseeable future.

Successful diversification

Garmin, a company best known for its automotive GPS navigation systems that have become increasingly irrelevant in the age of smartphones, has made major strides to diversify away from that business. Garmin's total revenue grew by 7% in 2016 despite a 17% slump in its automotive segment, driven by its other lines of business.

The fitness segment was Garmin's largest during the fourth quarter, growing by 20% year over year, and the company sees it being its largest segment in 2017 as well. The outdoor, marine, and aviation segments grew by 46%, 19%, and 13% year over year, respectively, during the fourth quarter, further counteracting the weak automotive segment.

Garmin currently pays a quarterly dividend of $0.51, putting the dividend yield just over 4%. The payout ratio is high -- Garmin expects adjusted EPS of $2.65 in 2017, with 77% of this going toward the dividend. This means that dividend growth will likely be slow until earnings begin growing at a faster pace. Still, a 4% dividend coupled with the potential for growth looks like an interesting proposition for dividend investors.

Timothy Green owns shares of IBM. The Motley Fool recommends Nordstrom. The Motley Fool has a disclosure policy.

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Stocks Mentioned

International Business Machines Corporation Stock Quote
International Business Machines Corporation
$134.01 (1.11%) $1.47
Nordstrom, Inc. Stock Quote
Nordstrom, Inc.
$24.37 (0.54%) $0.13
Garmin Ltd. Stock Quote
Garmin Ltd.
$100.07 (1.42%) $1.40

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