Betting on stocks when the market is seemingly making regular new highs requires a bit of chutzpah, but there are still a number of smart plays in the market for investors bold enough to accept a bit of risk.
We asked three top Motley Fool contributors to come up with a dividend stock for bold investors. Read on to learn why they believe National Retail Properties (NNN +0.68%), Garmin (GRMN +3.40%), and Hershey (HSY +0.81%) are stocks that fit the bill.
Image source: National Retail Properties.
This rock-solid REIT is trading at a discount
Brian Feroldi (National Retail Properties): Even casual followers of business news are likely aware that many retailers are struggling. High-profile chains including Macy's, J.C. Penney, and Abercrombie & Fitch are closing stores, while a few harder-hit concepts such as The Limited, hhgregg, and Wet Seal have declared bankruptcy. Combine this bleak environment with the potential for rising interest rates and it is understandable why traders have sold off shares of National Retail Properties. After all, this REIT's 2,500 properties are exclusively leased out to freestanding retail concepts. That means this company must be in a world of pain right now, right?
Actually, a closer look at the company's numbers suggests otherwise. As of the end of March, National boasted an occupancy rate of 99.1%. Revenue and core funds from operations -- a REIT proxy for earnings -- continued to march higher as well.
How can this be? The answer lies in National's business model. It uses a number of tactics to protect itself from the ever-changing retail landscape. First, the company has its customers sign long-term leases. In fact, as of the end of March, its average lease had 11.4 years left on it. Next, the company avoids retail businesses that could be put out of business by the internet. That's why its tenants are primarily convenience stores, restaurants, auto service centers, movie theaters, and health and fitness studios. Finally, its properties are all rented under net lease terms. That means that the tenant is responsible for all variable expenses -- taxes, maintenance, insurance -- while National simply sits back and collects rent checks.
Now that you understand National's business model, perhaps you can understand how the company's dividend has increased for 27 years in a row and why its occupancy rate didn't dip below 96% during the depths of the financial crisis. That should give investors confidence that they can safely make a "bold" bet on this out-of-favor dividend payer that offers up a yield of 4.8%.
Image source: Garmin.
Find your way to a 4% yield
Demitri Kalogeropoulos (Garmin): Investors are understandably nervous about entering the wearable-tech space right now. After all, industry leader Fitbit (FIT +0.00%) is down over 60% in the past year after its sales volumes tanked under increasing competition from value-based rivals and from those chipping away at the premium end of the market.
Garmin represents a less risky -- but still bold -- bet on the industry. The GPS device specialist's fitness segment is set to overtake its shrinking automotive division this year. Yet in addition to wearables, Garmin gets a significant chunk of revenue from its healthy marine and aviation segments. Overall, despite a 17% drop in sales of car GPS devices in 2016, the product portfolio delivered 7% growth. Its profitability improved to 56% of sales at the same time, even as Fitbit's slumped.
Garmin isn't expecting much sales growth in 2017, with revenue holding roughly flat at $3.2 billion. The good news is that most of the revenue declines will come from the lower end of the market, and so profitability should stay close to 56% of sales.
Its dividend, meanwhile, currently yields over 4% to make it one of the most generous on the market. At $2.04 per share, the dividend is projected to take up an uncomfortable 75% of earnings, however, the GPS giant's cash flow provides slightly better coverage. In the last fiscal year, it generated $706 million of operating cash compared to dividend payments totaling $562 million.
Image source: Hershey.
A sweet payoff
Rich Duprey (Hershey): Chocolatier Hershey felt the pinch, as many food companies did, as consumers have moved to fresher and more healthy options, but it was still able to grow sales in the first quarter nearly 3%, hitting $1.88 billion.
It's a tough market as consumers try to cut back on sweets, fatty foods, and sugary drinks, and Hershey had the added burden of fending off a $23 billion merger proposal from global snack giant Mondelez International, which caused its stock to soar in anticipation. Over the years there have been several attempts to buy the chocolate maker, but the trust that runs the company has always rejected the offers.
That left Hershey with the task of growing back its business, and over the past year its stock has gained 25% from the effort. Shares are up nearly 10% this year alone. Yet it's still a tough sector to be in, and it requires investors to be a bit bold to ride out the difficulties.
Earlier this year, the company reduced its annual sales growth guidance and announced plans to cut its global workforce by 15%. Yet it also wants to get in on the better-for-you-foods trend as it introduced healthier snacks that include ingredients like nuts while also repositioning existing treats like Kisses as portion-controlled snacks with just 25 calories.
While Hershey's first-quarter results came in below expectations, its stock still rose -- likely because there was an across-the-board slowdown felt by almost all consumer product companies, the fault for which was declared to be the delay in sending out income tax refunds. While that seems a bit specious for a candy company -- you're not going to buy a candy bar because you didn't get your refund check? -- it could have kept people from making trips to the grocery store that they might otherwise have made.
Hershey's stock isn't the cheapest on the market and its shares have gained a lot of ground in recent weeks, but for investors brash enough to take a flier here (while also snacking on an annual dividend of $2.41 per share that yields 2.4%), Hershey's has plans in the works to turn things around.
