There are two ways a stock's dividend yield can rise. The company can raise its dividend, or the stock can tumble. International Business Machines (NYSE:IBM), General Motors (NYSE:GM), and Target (NYSE:TGT) have been punished this year, but the market's pessimism seems to have gotten out of hand in each case.
All three of these hated stocks offer exceptional dividend yields, along with substantial dividend safety. If you're a dividend investor looking for yield and value in an expensive market, look no further.
International Business Machines
Shares of IBM are down about 8% year to date and 16% since peaking earlier this year, vastly underperforming the broader market. Despite signs that IBM's multi-year transformation is on the cusp of producing revenue growth after a half-decade of declines, the market is still valuing the company at pessimistic levels.
This is great news for dividend investors looking to lock in a high yield at a discounted valuation. IBM's $1.50 per share quarterly dividend is good for a yield of about 3.9%, and that dividend only eats up 43.5% of the company's guidance for full-year adjusted earnings. Even absent much earnings growth, IBM would have no problem keeping its 22-year streak of dividend increases going.
IBM trades for just 11 times adjusted earnings guidance and 12.75 times GAAP earnings guidance, while the S&P 500 goes for around 25 times trailing-12-month earnings. Revenue is expected to grow during the fourth quarter, driven by a newly released mainframe system and the continued growth of IBM's cloud business. The mainframe will continue to be a tailwind in 2018, and the rollout of AI-focused POWER9 systems should help the cause.
IBM deserves more credit than the market is willing to give it. For dividend investors looking for yield and value, now's the time to buy.
GM has shown this year that it's a lot more than a legacy automaker unable to keep up with the times. The company announced in October that it will launch 20 new all-electric vehicles by 2023, with two due in the next 18 months. GM's Chevrolet Bolt, its first all-electric car, outsold all three Tesla models in the U.S. last month, moving nearly 3,000 units. And the company announced just a few weeks ago that it planned to commercially launch fleets of self-driving cars in dense urban environments in 2019.
As GM is doing all of this, its core business is still producing solid profits. The company expects to generate adjusted earnings of roughly $6.25 per share this year, putting the price-to-earnings ratio at about 6.5. To be fair, earnings will almost certainly decline going forward if demand in North America weakens. But with such a low valuation, investors are getting a sizable margin of safety.
GM stock yields about 3.7%. Because the dividend represents just 25% of the company's adjusted earnings guidance, it's safe under a wide variety of scenarios. Unless there's another financial crisis-level event, GM should be able to maintain its dividend without any trouble.
GM stock has surged this year, up about 18% year to date, but it's tumbled 11% from its recent high. The market is assuming the worst, valuing it at a rock-bottom valuation. Dividend investors looking for a safe, high-yield dividend stock should seriously consider GM.
Retailer Target isn't messing around anymore. The company announced this month that it would acquire Shipt, an online grocery delivery service, for $550 million. Target will use the acquisition to provide customers with same-day delivery at half of its stores by early next year, and at most stores in all major markets by the 2018 holiday season.
Amazon.com's relentless focus on providing convenience for its customers is forcing the hand of all traditional retailers. This is the biggest move Target has made so far, and it probably won't be the last. As Target invests in e-commerce, performance at its store has improved. Comparable sales jumped 0.9% in the third quarter, with comparable traffic rising 1.4%. The company's bet on exclusive brands appears to be paying off.
Target stock is down about 13% this year, pushing the dividend yield up to 3.9%. It won't be smooth sailing for Target over the next few years, as pressure from Amazon continues to transform the industry. But with a 50-year record of raising its dividend, there's a lot to like about this traditional retailer.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Timothy Green owns shares of General Motors and IBM. The Motley Fool owns shares of and recommends Amazon and Tesla. The Motley Fool has a disclosure policy.