Most established companies pay hefty dividends today, but income investors can do a lot better than the roughly 2% yield paid out by the broader market.
Below, Motley Fool investors highlight a few stocks that pay at least a full percentage point above that annual yield. Read on to find out why General Motors (GM -0.17%), Target (TGT 1.03%), and HCP (PEAK -0.17%) each deserve a spot on your income watchlist.
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A dividend for the long haul
Jeremy Bowman (General Motors): A good dividend stock is hard to find these days. With the market near all-time highs and valuations stretched, yields have fallen, but one strong candidate for dividend investors to consider is General Motors.
The market has treated the automaker with skepticism since its IPO in 2010 following bankruptcy during the financial crisis, and it now trades at a price-to-earnings ratio of just 6.2, much cheaper than the S&P 500's valuation around 25. Cheap stocks often make for good dividend picks, and GM is no different. The stock offers a yield of 3.7%. While General Motors hasn't raised its dividend in two years, as the U.S. auto market appears to have reached its cyclical peak, the company still looks like it has a bright future ahead of it.
GM is coming off a quarter in which adjusted earnings per share increased 21%, driven by strong sales of its latest crossover models as well as pricing power and cost controls. The company has made smart investments in autonomous vehicle technology, acquiring Cruise Automation, for example, and partnering with Uber and Lyft. GM said recently it expects to have a fleet of autonomous vehicles ready for ride-hailing services as soon as next year.
After a year of flat earnings growth, the company sees profits increasing in 2019 when a new line of full-size pickups hits the market. GM also has a strong track record of beating analyst estimates. While the company may not raise its dividend until profits begin growing again, there's plenty of room to do so, as its payout ratio is just 23%.
One of retail's oldest dividends
Demitri Kalogeropoulos (Target): A rebounding stock price has sent Target's dividend below the recent peak of 4.6%, but income investors can still snap up shares of this retailer.
This isn't a robust growth stock right now. In fact, Target is on track to expand comparable-store sales by just 1% in 2017, which would mark only a minor uptick over the prior year's 0.5% decline. In addition, profits are being depressed by the company's investments in its digital sales channel and in improving the in-store shopping experience through, among other things, higher employee wages.
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Yet recent trends demonstrate that these investments are paying off for Target and imply that its large network of retailing locations still has value as consumers shift more of their spending online. Customer traffic shot up during the most recent holiday shopping period, and e-commerce sales spiked, too. Overall, comps rose by 3.4% to beat management's forecast of 1%.
Those modestly improving results make it likely that Target will have no problem funding its dividend for the foreseeable future. That payout has increased each year since the retailer went public in 1967 and today it takes up a comfortable 50% of annual earnings.
Time to consider this unloved healthcare stock
Neha Chamaria (HCP): HCP stock is down nearly 27% in the past year, as of this writing, pushing the healthcare real estate investment trust's (REIT) dividend yield to a hefty 6.5%. A couple of factors have weighed on the stock, including asset divestments and moves to reduce the company's reliance on one of its key clients, Brookdale Senior Living, which hurt HCP's top line and funds from operations (FFO) in 2017.
HCP, however, remains a great dividend stock -- especially at current prices. Thanks to aggressing restructuring, HCP is striving to build a high-quality, concentrated healthcare assets portfolio in medical offices, life science buildings, and senior housing that derives 95% of income from reliable private-pay sources. At the same time, the company is also cleaning up its balance sheet, having repaid debt worth $1.4 billion in FY 2017.
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As for dividends, investors were worried when HCP lowered its quarterly dividend by 36% in 2016. In reality, it wasn't a dividend cut as my colleague Matthew Frankel explains here, but simply the result of HCP spinning off its skilled nursing properties into separate REIT, Quality Care Properties.
HCP paid out only 76% of its adjusted FFO in dividends last year, which isn't high for a REIT. With HCP guiding for FFO between $1.73 and $1.79 per share compared with $1.41 generated in FY 2017, there's little chance it won't be able to sustain dividends. In the longer run, HCP should be well-positioned to take advantage of increasing demand for healthcare from an aging population and reap income investors strong returns.
