Consumer goods giant Unilever (UN) is awfully generous to its shareholders. Though its 2.7% dividend yield isn't the highest, in today's low interest environment, it's nothing to sneeze at, either. Still, some income investors would like more, so we asked a few investors for even better alternatives.
The three that made the grade include tech mainstay IBM (IBM 1.05%), fellow consumer goods provider Newell Brands (NWL -1.26%), and department store king Macy's (M -1.52%).
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Light at the end of the tunnel
Tim Brugger (IBM): The upside to the Street's tepid view of IBM is that its already strong dividend is now hovering around 4%, handily topping Unilever's 2.7%. IBM's 9% drop in value in 2017 also makes it one of the best values among its peers.
At just 12.7 times earnings, and a meager 10.8 times forward earnings, IBM offers both income and value investors something to enjoy. Better still, despite the relative negativity, IBM is delivering on its strategic imperatives initiative. Strategic imperatives include the cloud, data security, mobile solutions, and cognitive computing. The all-important group continues to make up a larger piece of IBM's total revenue each quarter.
IBM exited the third quarter with a cloud annual run rate of $15.8 billion. Cloud sales are an important metric to monitor because the segment is also home to many of IBM's other strategic imperatives offerings. Last quarter's $8.8 billion in combined revenue from the all-important units equaled 46% of IBM's $19.2 billion in total sales.
Much has been made of IBM's quarterly streak of declining sales, though last quarter was essentially flat. But for investors, the fact that each one of IBM's strategic units rose again last quarter is what matters over the long haul. Mobile sales were up 7%, analytics 5%, and data security soared 51% above last year.
IBM's low valuation translates to less downside risk, and it's gaining momentum where it counts. When you add its 4% dividend yield to the mix, IBM represents a compelling opportunity for both value and income investors.
Two recession-resistant dividend payers -- but one is better than the other
Rich Smith (Newell Brands): Shampoo and skin lotion, chicken bouillon and margarine, ice cream and tea -- these are a few of Unilever's favorite things. And for recession-fearing, dividend-loving investors, they're all good things, things we all use -- and buy -- every day. Things we won't stop using even if the economy goes into the toilet.
And yet, Unilever isn't the only company whose business revolves around manufacturing daily use, low-cost consumer items that will sell in any economy. With a portfolio of brands including Sharpie markets and Paper Mate pens, Newell Brands -- the company you probably know better by its famous Rubbermaid brand -- seems at least as much of a recession-resistant, dividend-rich pick.
In fact, it may be an even better bet than Unilever.
Let's start with the dividend. Unilever pays its shareholders a 3% dividend yield annually. That's already a lot better than the average yield on the S&P 500 -- but Newell Brands pays even better: 3.2%. Newell also has the advantage in dividend sustainability, with a payout ratio of about 32% versus Unilever's 65%. The fact that Newell spends less of its profits on dividends today means both that it has more "cushion" to ensure it can maintain its dividend in the future, and more room to increase its dividend, too.
Topping it all off, Newell stock sells for just 12.1 times earnings, which is barely half the price of Unilever's 23.6 P/E ratio. If its bigger dividend check isn't enough to pique your interest, perhaps the ultra-low P/E ratio will be.
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A risky high-yield play worth a closer look
Jeremy Bowman (Macy's): There's been no shortage of commentary on the "retail apocalypse," but one consequence of sliding retail stocks is that dividends in the industry have gotten to be especially juicy. None is more so than Macy's, which now offers a dividend yield of 7.3%.
Investors may be understandably wary of taking a chance on Macy's given the headwinds in the department-store sector, but there are signs the company is turning the corner. Shares popped earlier this month after the company issued a better-than-expected quarterly earnings report, and retail stocks also got a boost from reports of a strong Black Friday and Cyber Monday, although Macy's experienced a credit card glitch that may have hampered sales.
The venerable retailer also has a bevy of real estate assets no other retailer can compete with. It's started selling off stores and floors of larger properties, consolidating its retail space in the process, and the gains from such sales should provide a substantial supplement to business profits in the coming years. Thus far this year, the company has gained $176 million in real estate sales, nearly a third of total operating income.
Meanwhile, Macy's dividend, despite its high yield, remains amply funded with a payout ratio of less than 50% based on this year's adjusted earnings per share guidance of $3.38 to $3.63 and its free cash flow. A high yield is not adequate compensation for a falling share price, but if Macy's business can stabilize, the retailer looks like a great choice for dividend investors.
