Our contributing investors have identified three stocks that pay above-average dividends today, while also offering great prospects for long-term returns. Not only do these companies have strong track records of dividend growth, but they also serve important roles in the industries they participate in.
Below, you'll see why branded consumer-foods leader The J. M. Smucker Company (SJM 0.26%), natural gas and NGL (natural gas liquids) gathering and distribution specialist ONEOK, Inc. (OKE +0.14%), and healthcare real estate giant Welltower Inc. (HCN 0.70%) made the cut as high-yield stocks ideal for your nest egg.
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Try a bite of this consumer-foods specialist
Demitri Kalogeropoulos (Smucker's): A stock-price decline of almost 20% this year has pushed J.M. Smucker's dividend yield up to its highest level since the 2008 recession. Long-term investors should consider taking advantage of that slump. After all, shares of this branded-food-products specialist now yield 3%, compared to 2% for the broader market.
Sure, the company is facing big growth challenges today, as discount and private-label brands chip away at the industry leaders' market-share positions. But Smucker's brings some impressive assets to this fight. Three-quarters of its sales come from categories like coffee, where it holds the No. 1 or No. 2 spot in the market. It also controls a deep portfolio of franchises, given that you can find at least one of its products in nearly every household in the country.
Smucker's is hoping to ride that brand strength to faster growth over time, as it adjusts its food offerings to match consumers' demands for more convenience and better ingredients. In the meantime, income fans can look forward to many more years of dividend growth, since its current annual commitment of $350 million is well-covered by robust free cash flow.
Big yield, plenty of growth
Reuben Gregg Brewer (ONEOK, Inc): There are a lot of moving parts at oil and natural gas midstream player ONEOK. That's because this company recently bought its associated limited partnership, giving it greater control of all of its assets. But, more importantly, this move will help reduce ONEOK's cost of capital. That will make it easier to grow the business, and the distribution, in the future.
As for the dividend, ONEOK yields around 5.3% today, not bad when an S&P 500 index fund only offers you a yield of 2% (or so). And ONEOK has increased its dividend every year for an impressive 15 years in a row. The goal from here is for dividend growth of 10% a year through 2021.
OKE Financial Debt to EBITDA (TTM) data by YCharts.
That said, you'll want to keep your eye on the company's leverage. The ratio of debt to EBITDA stands at around 5.2 today, which even management believes is too high. It's looking to solidify its balance sheet by pushing that metric below 4. It will be a delicate balancing act to increase dividends by 10%, invest in growth projects, and lower debt all at the same time. There's no particular reason to believe it can't be done, but you'll want to pay close attention just the same -- to ensure that management is living up to its word while this high-yield stock helps you to grow your nest egg.
This real estate giant's new focus has multidecade potential
Jason Hall (Welltower Inc.): Still one of the biggest healthcare-focused REITs, Welltower has spent the past couple of years divesting many of its longest-held real estate holdings. This move has started taking a bite out of its operating cash flows and funds from operations, a move that some investors fear could put its dividend -- yielding over 5% at recent prices -- at risk, if the company can't acquire and develop enough new properties quickly enough to offset the hit to its cash flows.
This has played a role in sending Welltower's share price down 20% from its peak in 2015, and 13% from its 12-month high. At the same time, the S&P 500 has climbed 15%.
So what makes Welltower worth a close look today? Two things.
To start, management has taken a risk in selling off so much of its portfolio to start a more focused strategy, but that strategy is built to take advantage of the biggest aging trend in history, which will require a significant number of the kinds of facilities Welltower plans to build in coming years. And with a solid history of accomplishing what it sets out to do, Welltower's management helps make this a risk-reward opportunity investors should seriously consider.
Second, the recent sell-off has helped make Welltower a better value, particularly if cash flows are starting to stabilize. At recent prices, Welltower shares trade for just over 16 times funds from operations. That's not dirt cheap, but it's also not crazy-expensive, and it could turn out to be a fantastic price to pay for investors who buy now and hold for years to come.
It will take 13 years for the entire baby-boomer generation to reach retirement age, and another 15 years after that for the last boomer to turn 80. Welltower's strategy of focusing on the oldest boomers -- particularly those with Alzheimer's and other forms of dementia -- could deliver decades of market-beating total returns.
