It might seem risky to buy higher-yielding dividend stocks in today's market, as the S&P 500 hovers near historic highs and interest rates gradually rise. The logical move for conservative income investors would be to pivot from dividend stocks, many of which trade at premium valuations, to the relative safety of bonds.
Yet investors shouldn't completely ignore high-yielding stocks that still trade at discounts to the overall market. Let's take a closer look at three stocks which fit that description -- Tanger Factory Outlets (SKT 0.23%), IBM (IBM -8.36%), and Garmin (GRMN 0.04%).
Image source: Getty Images.
Tanger Factory Outlets
Tanger Factory Outlets owns 43 outlet shopping centers in the U.S. and Canada. The stock dropped nearly 40% this year due to ongoing fears of e-tailers crushing brick-and-mortar retailers. That sell-off reduced the ratio of its stock price to its funds from operations, a key metric for real estate investment trusts, to levels well below the industry average for retail REITs.
But Tanger isn't a retailer -- it's a property owner and landlord, which means that its business will keep growing as long as companies rent stores at its outlet centers. Outlet centers, like off-price retailers, are generally more resistant to the headwinds which are hurting traditional full-price shopping malls.
That's why Tanger reported an impressive occupancy rate of 96.1% during its third quarter. By comparison, Brixmor Property Group, which owns large shopping centers instead of outlets, reported an occupancy rate of just 92% last quarter. Tanger also raised its average base rent by 10.1% on renewed leases during the first half of the year, indicating that demand for outlet locations remains healthy.
Tanger's earnings are expected to dip this year, due to its expansion and remerchandising efforts, but to rebound and stabilize next year. Tanger currently pays a forward yield of 5.9%, which is supported by a payout ratio of 87%. It's also raised its dividend for 24 straight years, so the next hike will make it an elite Dividend Aristocrat.
IBM
At first glance, IBM looks like a dud, with 22 straight quarters of year-over-year revenue declines. However, Big Blue's sales decline of 0.4% last quarter marked a significant improvement from previous quarters, and indicated that it could finally break its losing streak in the near future.
IBM CEO Ginni Rometty. Image source: IBM.
The key to IBM's turnaround is the growth of its "strategic imperatives" (SI) businesses, which include its mobile, social, cloud, security, and analytics efforts. IBM believes that the growth of those businesses can offset the weakness of its legacy business hardware, software, and IT businesses.
SI revenues rose 10% annually to $34.9 billion over the past 12 months, accounting for 45% of IBM's revenue. That's up from 40% a year earlier, and indicates that IBM's investments in new technologies -- like its cloud platform Bluemix, AI platform Watson, blockchain, and quantum computing -- are slowly paying off. Meanwhile, IBM is protecting its bottom-line growth with cost-cutting initiatives, divestments, and buybacks. That's why its earnings are expected to rise 1.5% this year as its revenue slips 1.6%.
That bottom-line stability makes IBM a solid income stock, with a forward yield of 3.9% and a low payout ratio of 47%. It's also hiked its dividend annually for 22 straight years, and its stock remains cheap at 13 times earnings, versus the industry average of 20 for IT services companies.
Garmin
Garmin's core business of stand-alone automotive GPS devices has been shrinking, due to the rise of smartphones and integrated GPS systems. But that business only generated 25% of its sales last quarter, compared to 30% a year earlier.
Garmin's Vivoactive 3. Image source: Garmin.
That's because Garmin wisely diversified its business and focused on higher-growth markets, like outdoor, aviation, and marine GPS devices, as well as wearable fitness devices that challenge companies like Fitbit. That's why Garmin's total sales rose 3% annually last quarter, even as its automotive GPS sales plunged 12%.
Garmin expects its steady growth to continue, with its revenue this year rising 1.7% and pro forma earnings rising 2.5%. The company currently pays a 3.5% yield, which is supported by a low payout ratio of 69%. Garmin doesn't consistently raise its dividend every year, but its quarterly payments have gradually risen since 2014. The stock trades at just 16 times earnings, which is less than half the industry average of 35 for scientific and technical instrument makers.
3 stocks to consider more closely
Tanger, IBM, and Garmin all have high yields and low valuations, which could prove valuable during a market downturn. But there are also clear risks: Tanger could be slammed by weaker occupancy rates, IBM could drop if its SI growth dries up, and Garmin's growth could still falter if its automotive GPS or wearable revenues drop too rapidly. Even though I'd buy them despite those risks, investors should do their due diligence before buying any of these stocks.
