In today's market it can be hard to find stocks offering up notable yields -- but if you dig a little they're still there. Magellan Midstream Partners, L.P. (NYSE:MMP), International Business Machines Corp. (NYSE:IBM), and Southern Company (NYSE:SO) are three stocks you might want to buy, and each is yielding more than twice the market's roughly 2% average.
1. Slow and steady
First up is Magellan Midstream Partners and its roughly 5% distribution yield. The partnership owns oil and natural gas midstream assets, essentially helping to get energy from where it is drilled to where it gets processed and used. The vast majority of Magellan's business is fee based, so demand for oil and gas is more important than the price of either fuel.
It's a very stable business. For example, despite the steep decline in oil that started in mid-2014, from which the key global commodity has yet to fully recover, Magellan's distributable cash flow has increased in each of the last five years. This type of consistency is how Magellan has managed to increase its distribution for 17 consecutive years. Over the past 10 years the average annualized increase was an impressive 11%.
Looking forward, Magellan is targeting 8% distribution growth in each of the next two years, well above the historical rate of inflation growth. Backing those projections is around $1 billion in capital spending. Meanwhile, Magellan is one of the most conservatively run midstream partnerships around, with leverage below most peers and solid distribution coverage of 1.2 times.
2. Trusting it can be done
Magellan is a solid option for just about anyone looking for income. Investing in IBM, on the other hand, requires a little faith. It's no secret that the technology giant has been struggling lately, with quarterly revenues down year over year each quarter for over five years. It's the main reason why IBM yields around 4.1% today.
What's going on is that IBM is overhauling its business, something it's done many times before in its over-100-year history. In the past that meant shifting from making scales and clocks to making mainframes and computers. Today it means getting away from lower margin operations like manufacturing computers and shifting toward higher margin businesses like cloud computing, artificial intelligence, and security. It's been a slow process.
If you believe that IBM can pull off another transformation, however, then you might want to add it to your short list. It's worth noting that the company has increased its annual dividend for 22 consecutive years and that, despite the top line declines, it remains highly profitable. For example, revenues have declined almost 20% over the past decade, but earnings per share are higher by more than 70%. IBM, meanwhile, is still generating enough cash flow to cover its dividend and transform its business. It might be worth the risk for more aggressive investors.
3. More headline risk
Another high yielder facing bad news is Southern Co. This electric and natural gas utility serves roughly nine million customers, largely in the Southeastern United States. The big news lately has been the company's troubles building a pair of new power stations, one nuclear and the other a clean coal facility. These projects have been beset by delays, cost overruns, and even the bankruptcy of the company Southern hired to build the nuclear plant! It's safe to say that things have not been going according to plan on the construction front.
But there's a lot going on behind those negative headlines. For example, Southern has been working hard to transform its business within the changing energy landscape. To put some numbers on that, the giant utility generated 60% of its power from coal in 2010. That number was down to 33% in 2016. Natural gas, a cleaner fuel, meanwhile, increased from 25% to 46% over that span. Speaking of natural gas, Southern bought a gas utility last year, as well. That deal brought with it regulated gas customers and midstream assets that it can use as a foundation to expand in the future. Southern has also been investing in clean power via its independent power subsidiary.
So there are clearly negatives here, but Southern has a lot of positive things going on too, which is why the utility's 4.7% yield might interest you. That and the fact that it's held its dividend steady or increased it every year since 1948. The business, meanwhile, is backed by regulated assets that will continue to generate steady and increasing earnings as Southern invests in upgrading its operations. In fact, even after all of the bad news, management still expects earnings to grow at an annualized rate of around 5% a year through 2022 -- a decent number for a stodgy old utility and more than enough to support continued dividend growth.
A swan and two ugly ducklings
Of this trio, Magellan is a relatively low-risk option offering a high yield. Just about any investor could own this midstream partnership and sleep well at night. IBM's slow turnaround and Southern's construction woes, on the other hand, are a little more troubling. If you can't see the silver linings at these two you might want to pass on their over-4% yields. But if you can stomach the near-term volatility, these high yielders could be worth the risk for long-term investors.