Even the most well-known companies that pay dividends can have problems with their business from time to time. Perhaps it's a new competitor that's upending the business or a new technology taking the world by storm, which can make some dividend plays bold bets for investors.
Our top daring dividends today come from a wide range of industries, with General Motors (GM 4.03%) in the auto sector, Las Vegas Sands (LVS 0.94%) in gaming, and AES Corp. (AES -2.35%) in energy. Here's why it takes a strong stomach to invest in these stocks and why we like their dividends for the long term.
An auto dividend you should love
Brian Stoffel (General Motors): If I were an investor in any car company, a recent report by RethinkX would scare the daylights out of me. Because of cost advantages that most mainstream outlets are overlooking, RethinkX believes that within 15 years, 95% of all miles driven will be via AI electric car fleets. The number of cars on the road, according to the analysis, would shrink by 80%.
Never mind a cyclical slowdown in car buying worldwide. If RethinkX is correct, shares of companies like General Motors could be in for a world of hurt. That's why I think buying shares of the company and its dividend is only for the truly "daring" investor.
Granted, there is a lot to like about the stock. Currently, it yields an eye-popping 4.4%. Good luck finding bonds with that kind of yield. And over the past 12 months, that dividend has only eaten up 25% of the company's free cash flow, meaning that it is relatively safe and sustainable. Throw in there the fact that shares are trading for less than six times said free cash flow, and you've got one heck of a cheap stock.
Most investors are worried about growing inventory at GM and the prospect for serious slowdowns. Long-term investors should start considering what autonomous driving means for the future of the car industry. If you believe GM will make it out alive, then the stock appears to be a good deal right now.
This stock is worth a bet
Dan Caplinger (Las Vegas Sands): The casino gaming industry has been a volatile place to invest in recent years, as the Asian gaming capital of Macau has gone through a huge contraction. Yet more recently, Macau has started to come back to life, and that has helped push shares of industry giant Las Vegas Sands back upward after having seen its stock lose more than half its value between its highs in early 2014 and its lows in January 2016.
The reason why Sands is a daring pick at this point is that it has lost some of its competitive edge in Macau. Rivals have built up their own casino resort holdings, and that has led to Las Vegas Sands losing market share, especially on the key Cotai Strip where Sands once had a dominant position as first mover. In addition, some point to its dividend yield of more than 6% as unsustainable.
Yet the casino giant has opportunities for future growth that could also help sustain and grow its dividend. The most lucrative could come from Japan, which is looking at opening up its market to a casino resort in the near future. If that happens, Sands will be on the short list to capture that lucrative license, and although the price tag will be high, it would mark a huge victory for Las Vegas Sands if it can win out. Overall, with the casino industry strengthening, Las Vegas Sands looks like a good stock for income investors to look at.
The utility of the future?
Travis Hoium (AES Corporation): The independent power producer business is in rough shape today as low natural gas prices and renewable energy has put a ton of pressure on electricity prices. Peak demand that used to be a windfall is being eaten up by solar and wind and low-cost natural gas is making coal and many nuclear plants uneconomical. And utilities have to make a transition to the energy industry of the future.
One of the companies making a daring break from the old utility model to a renewable energy focus is AES Corporation. It's already one of the biggest energy storage developers in the world and it recently bought half of solar developer sPower.
If AES is going to survive as a utility, it's going to do so by transitioning to the development and ownership of wind, solar, and energy storage assets. It is also making that transition faster than most utility competitors. AES has a total of 37 GW of generating capacity today and just 1.3 GW of that is wind and solar. But with sPower, it has 10 GW of renewable projects in the pipeline, one of the biggest pipelines in the world.
On top of making the transition to renewables more aggressively than most utilities, AES pays a nice 4% dividend yield today. It's not a sure bet that AES can become a model for the utility of the future, but it has a better shot than most utilities and that's worth taking a bet on.