Buying and holding great stocks is the best way to predictably generate wealth over the long term. And finding the best stocks that also pay a healthy dividend can effectively accelerate that process and bolster your returns.
With its commanding industry leadership and a dividend yielding nearly 5.5% annually as of this writing, AT&T is a fantastic portfolio candidate to that end.
But AT&T isn't the only high-yield dividend stock worthy of your consideration. So we asked three top Motley Fool investors to each discuss a dividend stock that cuts even bigger checks than AT&T. Read on to learn why they chose DineEquity (NYSE:DIN), GameStop (NYSE:GME), and Welltower (NYSE:WELL).
Fill up with an appetizing yield
Steve Symington (DineEquity): With its shares down around 34% last year, DineEquity isn't exactly a market darling right now -- and with good reason. As the broader casual-dining industry suffers from falling traffic and increased competition, the parent company of IHOP and Applebee's saw the two chains' comparable-restaurant sales fall 2.5% and 7.3%, respectively, through the first nine months of last year.
But after the decline, DineEquity stock offers a dividend with a juicy annual yield of 7.5% as of this writing, presenting an intriguing opportunity for investors willing to bet on its ongoing turnaround.
DineEquity is starting to see the first fruits of several strategic moves, notably including a recent management shakeup, closing 160 underperforming locations, and efforts to simplify their menus. As a result, comps turned positive at both IHOP and Applebee's in October, and newly appointed CEO Stephen Joyce expressed confidence that DineEquity will be able to soon return to serving up sustained, profitable growth.
When that happens, DineEquity's share price should follow suit -- and the chance to buy while its yield is still unusually high will be lost.
A retailer on the ropes
Keith Noonan (GameStop): When you look at investing in companies that offer dividend yields that are substantially higher than AT&T's, taking on a greater degree of risk is often involved. GameStop stock offers a whopping 8.3% dividend yield and trades at just 5.5 times forward earnings estimates and 0.2 times forward sales. The counterweight to those otherwise attractive metrics is that the company needs to successfully transform its business in order to remain viable over the long term.
The company's October-ended quarter saw new and used video game products account for a combined 56% of sales and 52% of gross profits. Unfortunately, these revenue streams are on track for continued erosion as consumers increasingly opt to purchase games digitally, and GameStop will tumble in tandem unless it can sufficiently build up its collectibles and mobile hardware and service sales. That raises the question of whether the specialty retailer's payout is sustainable. Right now, the cost of distributing its dividend represents roughly 61% of the company's trailing free cash flow, providing some buffer as the company works to strengthen its other business pillars to offset waning game sales.
There's no denying the unfavorable outlook in the video game software market, but the timeline for decline might also not be as bad as many are anticipating. The success of Nintendo's Switch console should be a substantial boon to GameStop, and new consoles from Sony and Microsoft will likely hit the market within the next several years and give the company's gaming segments a shot of energy. With limited visibility for how its business transformation will play out, GameStop remains a risky investment, but the stock could have big upside if its pivot proves even moderately successful.
Matt Frankel (Welltower): It's tough to find stocks with bigger payouts than AT&T's 5.46% yield, especially if you want stability and growth potential. However, one stock where you can find all of those things is Welltower, a low-risk real estate investment trust focused on healthcare properties.
Roughly 70% of Welltower's portfolio is in senior housing, and while there are some oversupply concerns in the industry, it should be a beneficiary of a positive long-term demographic trend. The 85-and-older population in the U.S. is expected to roughly double over the next two decades, which should create tremendous demand growth.
Additionally, Welltower is the largest healthcare REIT and the industry is still in the early innings of REIT consolidation. Several other types of commercial properties, such as hotels and malls, have REIT ownership rates of 40% or higher, whereas just 15% of healthcare properties are owned by REITs. As one of the most financially flexible REITs in the space, Welltower has an advantage when it comes to growth through acquisitions.
Finally, it's important to note that healthcare real estate is perhaps the most recession-resistant type of real estate. Just as AT&T benefits from the fact that consumers will (mostly) pay their phone bills, even in tough times, Welltower's properties benefit from Americans' need for healthcare, regardless of what the economy is doing.
The bottom line
There's no way to guarantee that these three stocks will outperform AT&T or the broader market. And while each company faces risks that could prevent it from doing so -- from Welltower's oversupply concerns to difficult industry dynamics for both DineEquity and GameStop -- at today's prices, their high dividend yields help effectively negate that risk. At the very least, investors should take a closer look at shares of these three promising businesses.