Regardless of sector, there are a number of stocks that reward shareholders with outstanding dividends along with growth opportunities. We asked a few Foolish investors for some top stocks to buy in July with strong dividends, so without further ado, tech stalwart Cisco (CSCO 2.63%), auto manufacturing giant General Motors (GM 3.47%), and natural gas provider ONEOK (OKE +0.42%) all warrant a look from investors in search of high-yielding stocks.
Turning the corner
Tim Brugger (Cisco): It's been a so-so year for Cisco shareholders. With its stock up just 5%, Cisco may not be the first high-yield dividend stock on a buy list for July. However, despite a relatively flat top line, there's a lot to like about Cisco over the long haul in addition to its 3.7% dividend yield.
Though the $11.9 billion in sales Cisco reported last quarter was down slightly from $12 billion a year ago, CEO Chuck Robbins is delivering on his promise of a leaner, more efficient company focused on cutting-edge markets and building a foundation of recurring revenue.
Despite the 1% drop in revenue, Cisco's net income climbed 7% to $2.5 billion in its fiscal second quarter thanks to an 8% decline in operating expenses to $4.3 billion. Cisco's focus on managing overhead also boosted operating income 6% to $3.2 billion.
Better still, investors can expect more of the same thanks to Cisco's recurring revenue push, which already equals 31% of total sales, up from 29% a year ago. The emphasis on recurring revenue means investors aren't likely to see Cisco's top line soar on a quarterly basis, but it does form a stable foundation shareholders can rely on.
And with Cisco's forays into data security, the Internet of Things (IoT), and analytics, in full swing, it's targeting all the right markets to drive future growth. Toss in Cisco's relative value -- it's trading at just 16 times earnings, well below the industry average of 28 -- along with its dividend yield, and it's a stock worth considering in July.
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An underappreciated automaker
Keith Noonan (General Motors): Auto industry leader General Motors trades at just 6 times forward earnings estimates and packs a 4.2% dividend yield. Those are metrics that should pique the interest of value investors and are largely explained by concerns that the auto industry is on a downtrend after reaching the top of a sales cycle and the potentially disruptive threats posed by Tesla Motors and the rise of ride sharing.
The market seems to be underestimating the extent to which GM is prepared for the next down cycle and big trends in automotive technology. The company expects that it will be the first to achieve profitability with electric cars, and its scale advantages should give it significant manufacturing advantages compared to a company like Tesla. GM also appears to be ahead of the curve when it comes to autonomous vehicles -- with self-driving Bolt EVs in production and a test fleet already operating. In the ride-sharing category, the company is building out its own platform, is partnered with Uber and Lyft to rent cars to drivers, and owns a 9% stake in the latter company. So, the auto giant is hardly the dinosaur it's sometimes made out to be.
Typically, the smart move when buying cyclical stocks like GM is to purchase when sales are at a low point and P/E ratios are relatively high, but it looks undervalued even in the face of falling auto sales. GM's earnings will fall if the automotive industry continues to slide into the down period, but its chunky dividend yield and what looks to be an overly pessimistic valuation make it a stock that's worth riding with for the long haul.
A big raise is in the forecast
Matt DiLallo (ONEOK): Pipeline company ONEOK recently closed the acquisition of its MLP, buying the rest of the units it didn't own in a $9.3 billion deal. That transaction did several things for the company, including simplifying the corporate structure, lowering the cost of funding, and enhancing its ability to grow the dividend. In fact, ONEOK plans to increase its already generous 4.5% payout by 21% later this year, with plans to increase it by a 9% to 11% annual rate after that through 2021. Further, it can achieve that robust growth rate while maintaining a dividend coverage ratio of more than 1.2 times.
Fueling that forecast is the pipeline of expansion projects it has in the backlog as well as the fact that it expects to get more than 90% of its earnings from stable, fee-based sources. Overall, ONEOK has between $1.5 billion to $2.5 billion of primarily fee-based expansions in development. These include high-return projects like well and natural gas processing plant connections that require minimal capital investments. Overall, the company believes it can earn adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) multiples of five to seven times on the projects in its backlog, which is a higher return than what many peers will earn on their expansions.
What makes July such an excellent time to buy ONEOK is the upcoming big boost to the company's dividend, which could come before the company's reports second-quarter results in early August. That increase might push the stock higher, which is why investors should consider buying before that happens.
