For many investors, the holy grail is a stock with a solid dividend, and a cheap valuation. But at the same time, where there's a high yield, there's potentially high risk. After all, in the current low-interest-rate environment, income-starved investors have bid up many of the best dividend stocks already, meaning that plenty of the high-yield dividend stocks out there may not be the deals they seem.
But that doesn't mean there aren't any high-yield stocks worth buying. In fact, three of our top contributing investors think that Ford Motor Company (F +3.46%), AT&T Inc. (T +0.47%), and Caretrust REIT Inc. (CTRE +0.00%) should be on your shortlist. All three pay yields of more than 4.5% at recent prices, and those payouts are stable, with prospects for future growth, too.
Low price. High yield. Image source: Getty Images.
Moreover, Ford and AT&T are both trading at what can only be described as "dirt cheap" valuations, while Caretrust's strong growth prospects can be bought at a 22% discount from the 52-week high. But that's just the starting point. Keep reading to learn more about these high-yield stocks at rock-bottom prices.
Take a ride with this value dividend stock
Dan Caplinger (Ford): You don't often find stocks that double the dividend yield of the market's average that trade at earnings multiples well below what the typical stock offers, but Ford fits that bill right now. Even before taking into account special dividends, Ford's yield of 4.6% puts it in the upper echelon of large-cap stocks. Yet the shares carry a price-to-earnings ratio of just 12, and on a forward-looking basis, that multiple drops down into the single digits.
2019 Ford Ranger. Image source: Ford.
Ford has been going through a transitional process, with a new leader taking the helm in 2017 and completely revamping the internal organization of his leadership team. The automaker has a lot in store for 2018, with many looking at the return of the Ford Ranger pickup model for the first time in eight years as the potential highlight among several vehicles that will get either new names or new approaches to their manufacture.
In the long run, you can expect Ford to play a key role in areas like self-driving vehicles, in-car entertainment systems, and zero-emission electric vehicles. Given its history of thriving even when its rivals faced financial challenges from which they couldn't emerge, Ford has the drive to make its presence felt in 2018, and investors are ready to reap the rewards.
A smart call
Danny Vena (AT&T): Shares of telecom giant AT&T were a disappointment to investors in 2017, having fallen nearly 9% in a year that the S&P 500 (^GSPC +1.20%) gained 19%. What's dragging down Ma Bell? Declining subscribers for the company's postpaid wireless business and slowing growth at its DIRECTV satellite television service. If that wasn't bad enough, the U.S. Department of Justice sued the company to block the company's pending $85 billion merger with Time Warner (TWX +0.00%).
Though challenges remain, there are plenty of things to like. AT&T is the second largest wireless carrier in the U.S., as well as the second largest provider of pay-TV services. Not content to settle for second place, AT&T recently announced that it plans to be the first U.S. company to roll out 5G mobile internet, hitting a dozen markets by late 2018.
Image source: Getty Images.
The falling stock has put pressure on the company's valuation, which now trades at roughly 12 times forward earnings estimates. On the other hand, the declining price has had the effect of boosting AT&T's dividend yield, which currently boasts a juicy 5.24%.
The company's payout ratio looks dangerously high at 93%, but significant non-cash expenses such as depreciation and amortization tend to distort the company's profitability. Free cash flow of more than $16 billion eclipses the nearly $13 billion in net income, providing plenty of cash to pay the dividend.
Investors can also take comfort in knowing that the company is a Dividend Aristocrat, having increased its payout in each of the past 34 years.
A buying opportunity
Jason Hall (Caretrust REIT): Since peaking at nearly $20 per share in late 2017, Caretrust REIT's stock price has fallen more than 22%, pushing its dividend yield to an incredible 4.8% at recent prices. Caretrust isn't unique in the healthcare REIT space, with both a high yield or a stock price that's down more than 20% over the past year's peak; many of its peers actually pay higher yields and have seen their stock prices fall even further since last summer.
So if the market is running away, what makes Caretrust a buying opportunity? In short, I think Caretrust is one of the best positioned REITs to profit from a big demographic shift under way, and fundamental changes in senior care, even if some of its peers struggle to grow from here.
Image source: Getty Images.
The big demographic trend is the millions of American baby boomers who have already started retiring -- a trend that will continue for more than another decade. By 2029, there will be more than 80 million 65-plus Americans, more than twice as many as two decades earlier. The 85-plus population will also have surged over that period and will probably continue increasing for years after. This surge will require more housing and healthcare facilities that provide the specialized care older people need, and Caretrust's management has the chops to be a major player in meeting this need.
Trading at about 15 times trailing funds from operations, Caretrust isn't as cheap as the stocks my colleagues offer. But today's stock price is the lowest it's been in nearly a year, the yield is the highest it's been since 2016, and Caretrust has by far the best growth prospects of the bunch. That's why I expect today's price could look like a real bargain in the future.
