It's easy to understand the allure of high-yield dividend stocks. After all, adding a healthy quarterly payout to traditional share price appreciation can be a recipe for market-beating returns over the long term.
But most high-yield stocks have outsize payouts because their share prices have declined, and telling the difference between the future market-beaters on track for rebounds and those that genuinely deserve the market's disdain is easier said than done.
To help you do that, we asked three top Motley Fool investors to each pick a high-yield dividend stock they believe would be a wise addition to portfolios this month. Read on to see why they chose Kohl's (KSS -3.54%), Verizon Communications (VZ -0.73%), and Caretrust REIT (CTRE).
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Buy while this dividend yield is still high
Steve Symington (Kohl's): Kohl's isn't exactly the most popular stock on the market right now; shares of the department store chain are down nearly 20% year to date. To be fair, investors have reason for their pessimism. Nearly all of Kohl's decline came in January, after it revealed disappointing holiday-quarter results and reduced its full-year guidance, in line with similarly painful reports from Macy's and J.C. Penney. Shareholders endured a more modest drop last month after a margin warning from Macy's spread fears of broader issues within the already-troubled department store industry.
But I'm not convinced that Kohl's is suffering as much as its peers. When it announced first-quarter results in early May, it celebrated significantly improved sales and traffic trends for March and April, and pointed to inventory management initiatives that it said helped boost its gross margin by 90 basis points year over year to 36.4%. As a result, Kohl's increased its net income per share by almost 26%, to $0.39, even as revenue declined 3.2%, primarily due to weaker comparable-store sales early in the quarter.
Of course, you might not find a brick-and-mortar chain with a declining top line all that compelling at a time when e-commerce titans like Amazon.com continue to muscle their way into traditional retailers' turf. But Kohl's shares are now trading below 11 times this year's expected earnings, and offering a juicy 5.7% annual dividend yield as of this writing. If the company is able to sustain the positive trends of Q2 into the future while its traditional competitors continue to falter, that price could come to look like a bargain.
A telecom giant going through a rough patch
Chuck Saletta (Verizon Communications): Telecommunications giant Verizon recently touched its 52-week low. Since a stock's yield moves in the opposite direction of its price, that decline lifted Verizon's yield to a hair above 5%. Currently, Verizon trades at around 12 times its expected forward earnings, which makes it a relative bargain in a market that averages a forward P/E of around 18. And while the company isn't exactly growing quickly, it is expected to grow its earnings at around a modest 2.5% annualized rate over the next five or so years.
Of course, there's a reason the company's shares are struggling. Its subscriber counts have been stagnating amid intensifying competition in the wireless space, and cord-cutting continues to take a toll on its wireline telephone service. Still, Verizon's strong reputation for quality -- including a top quality rating by J.D. Power in 2017 -- gives it more durable pricing power than its competitors.
While its future may not be incredibly rosy, the market has already priced many of the risks the company faces into its stock. If you're looking for a high-yielding dividend stock to buy in July, you could do far worse than Verizon.
A big dividend and bigger growth prospects
Jason Hall (Caretrust REIT): It would be no exaggeration to call Caretrust one of my favorite high-yield dividend stocks, based on reasons both near term and long term.
To start, this senior care and rehab facility real estate specialist yields just under 4% today, a wonderful payout in the current interest-rate environment.
Even better, with about 10,000 baby boomers hitting retirement age every single day, Caretrust offers investors a fantastic opportunity for long-term growth. America's elderly population is on track to grow by tens of millions over the next two decades, which will significantly increase the need for long-term care, rehab, and senior housing facilities. Caretrust, which owns 165 properties today, is set for many years of growth along with U.S. demand.
Furthermore, Caretrust is an exceptional value today. Even with its stock price up almost 17% so far in 2017, its shares are trading for about 15 times funds from operations (FFO) -- a better measure of cash flows and earnings for REITs than P/E since it excludes depreciation and amortization. This is quite cheap for a company with solid long-term growth prospects that should lead to years of steady dividend growth.
