Great dividend yields come with great anxiety. Now that the average dividend-paying stock in the benchmark S&P 500 index offers a paltry 1.8% yield, most stocks that offer 4% are just too hot to handle.
To help you sift through the haystack, we asked three Motley Fool investors each to highlight a stock that currently offers a yield of 4% or better. Here's why they think L Brands Inc. (LB 3.93%), AT&T Inc. (T +0.00%), and Realty Income Corp. (O +0.58%) are worth a closer look.
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A risky apparel stock
Tim Green (L Brands Inc.): Thanks to a steep slump over the past couple of years, shares of apparel retailer L Brands currently sport a 4.7% dividend yield. That's been little consolation to investors, who have watched the stock drop nearly 50% since it peaked in late 2015. But for dividend investors looking for a high-yield stock today, L Brands is an interesting option.
L Brands owns well-known brands such as Victoria's Secret and Bath & Body Works, with over 3,000 company-owned stores and an additional 1,000 franchised stores. The company's results have been far from stellar recently. In the third quarter, L Brands reported a 1% decline in comparable sales and an 18% decline in operating income. L Brands is dealing with the same problems plaguing the brick-and-mortar retail industry -- weak traffic and competition from e-commerce.
For dividend investors, there is some risk that L Brands will eventually need to cut its dividend. Based on the company's fourth-quarter guidance, it will produce $3.00 in earnings per share for 2017. With a quarterly dividend of $0.60 per share, the payout ratio is at an elevated 80%.
L Brands is not a stock for dividend investors looking to buy and ignore; the company will need to stabilize its earnings to avoid an eventual dividend cut. If you're looking for a safe dividend stock, L Brands isn't it. But for those willing to take on some risk to score a high yield, it may be worth a look.
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High-paying and an outstanding value
Tim Brugger (AT&T): Despite a few bumps recently, particularly after what some deemed a poor third quarter, AT&T generally is a modest-growth, high-income stock. Investors shouldn't expect sky-high growth, but its relative valuation and 5.35% dividend yield make it a top stock.
The near-term concerns were focused on AT&T's 3% drop in revenue year over year to $39.7 billion. Given that and the 9% decline in earnings per share, AT&T's stock fell about 4%. However, investors seemed to overlook some definite progress AT&T made in the quarter.
Yes, revenue was down, but AT&T's efficiency initiative took another step in the right direction as operating expenses eased 3.5%. The end result was flat operating cash flow, year over year, of $6.4 billion. As for those EPS concerns: After removing one-time items, AT&T reported earnings of $0.74 per share, flat compared to a year ago.
Wireless unit and customer retention were both exceptional last quarter. Postpaid phone churn was just 0.84%, a record low which AT&T attributes to its video and wireless bundling strategy. The wireless unit also set a record with operating income margins continuing to climb, led by AT&T's wireless service margin soaring to 50.4%.
AT&T also boosted its wireless customer base with 3 million net additions, 300,000 new DIRECTV customers, and solid broadband results. Valued at a meager 11 times forward earnings, AT&T and its 5.35% payout also represent a great value.
Slow and steady
Cory Renauer (Realty Income Corp.): My pick is a real estate investment trust (REIT) that Aesop's tortoise would be proud to own. Since listing on the New York Stock Exchange in 1994, it's raised its dividend by 4.7% annually. That rate isn't going to win any sprints, but it's helped the stock deliver a whopping 2,960% return for investors who reinvested every dividend.
Even though Realty Income Corp. owns plenty of commercial properties, it gets lumped in with peers that own increasingly barren retail properties. The slew of retail-store closings in recent quarters has applied enough downward pressure to the stock's price that shares offer 5% at recent prices. Retail closings are a valid concern, but selective tenant choices over the years have insulated this particular REIT from the fallout.
Nearly all of Realty Income's properties are freestanding, single-tenant structures, instead of shopping malls that spread pain from tenant to tenant. Also, some of the company's larger tenants, Dollar General and FedEx, are thriving in the age of e-commerce.
Most importantly, Realty Income employs long-term leases that generally include annual rent increases. This gives the company a reliable revenue stream that's allowed it to make 570 consecutive monthly dividend payments. Over the past 12 months, the REIT used around 80% of funds from operations to make dividend payments. That gives it enough breathing room to begin the next 570 installments.
