While dividend stocks as a whole have been shown to outperform their non-income-paying counterparts, finding a company with the right combination of risk and reward is no easy task. Higher yields typically come with a higher probability of troubles down the road. That harsh reality makes it difficult for investors looking to build a portfolio that produces an ongoing income stream.
It is also true that not all stocks with a high payout are risky. With that in mind, we asked three Motley Fool investors to choose top companies with payouts of 4% or more that still offer a measure of safety. They offered up compelling arguments for Royal Dutch Shell (NYSE:RDS-A) (NYSE:RDS-B), Ford Motor Company (NYSE:F), and AT&T Inc. (NYSE:T).
A 4% dividend? Why not shoot a bit higher?
Rich Smith (Ford): "Dividend stocks with yields over 4%," you say? Funny you should ask.
Just the other day I was writing up Morgan Stanley's "double upgrade" of Ford stock -- and would you believe that Ford is yielding 5.6%? And that doesn't include the recently announced supplemental dividend of $0.13 per share.
As Morgan Stanley's analyst was telling it, Ford stock, which is down 11% or so over the past year and trading at about $11, is due to surge past $15 within 12 months. According to this banker, Ford's F-150 franchise alone is worth about 50% more than what all of Ford stock currently costs. This suggests that not only can you buy the "best-selling truck in America" for about 33% off, but that in doing so, you'll be getting Ford's F-250s, its F-350s, and its Focus, Mustang, Explorer, Transit -- the whole shebang -- for free!
Which kind of sounds like a good deal.
Now, this is just one analyst's opinion, but I think the numbers support Morgan Stanley's argument. Tallying up Ford's market capitalization, its cash on hand, and its long-term automotive debt gives us about a $30.6 billion enterprise value on Ford stock. That's less than 3 times the company's $11 billion in annual free cash flow, and with analysts pegging Ford for roughly 3% annualized growth, Ford stock looks fairly priced to me based on its valuation and free cash flow alone, and worthy of at least a "hold" rating.
Throw in that 6.6% dividend yield, though, and Ford's valuation tips decisively toward "buy."
A top play in the future of energy
Maxx Chatsko (Royal Dutch Shell): While many investors may associate wind, solar, and energy storage with the future of energy, the discussion often overlooks one very important energy source: liquefied natural gas (LNG). It shouldn't be dismissed outright just because it resides in the bucket labeled "fossil fuels." Why not? The world is awash with cheap natural gas, it's cleaner than coal for generating electricity, it provides tremendous flexibility for grids moving away from coal and toward renewables, and it can now be shipped to nearly any point on the globe if converted into liquid form first.
In recent years, Royal Dutch Shell has gone all in on the LNG trend, which looks like a smarter bet with each passing year. It's the largest producer of LNG on the planet, with 45 million metric tons (MT) of annual liquefaction capacity -- and it has another nine facilities coming down the pipe. That includes the floating LNG project known as Prelude located several hundred miles off the coast of Australia, which is perfectly positioned to serve the world's fastest-growing import markets in Asia.
The incredible thing is that even though everyone predicted an overnight surge in LNG production and consumption, the global market continues to grow more quickly than the most ambitious predictions. In 2017, global trade eclipsed expectations by 26% to reach 293 million megatons -- and it's just the beginning. More than 80 million megatons will come online between now and the end of 2019.
In other words, Royal Dutch Shell's early investments in LNG will pay off quickly for shareholders and are expected to generate billions of dollars per year in cash flow by the end of the decade. That promises to make the company's current 6% dividend yield not only stable, but also primed for ample growth in the years ahead.
Making the right call
Danny Vena (AT&T): Dividend fans have long sought out AT&T, which sports one of the highest dividends available in the telecom industry, currently yielding over 5.5%. Pressure on the stock over the past couple of years has helped propel the company's juicy yield ever higher, but it's the opportunities that lie ahead that should make investors stand up and take notice.
In the fiercely competitive wireless industry, scale matters, and AT&T is not only the second largest wireless carrier, but also the second largest provider of pay-TV services, through its DIRECTV offering. While the number of traditional satellite customers continues to wane, the company's over-the-top streaming platform is catching on, having its best quarter yet, and adding 1.2 million subscribers since the service launched just over a year ago.
AT&T recently announced that it expects to be the first U.S. carrier to offer 5G service, which it will roll out in 12 markets late this year. The increases in network speeds will enable next-generation technologies, such as self-driving cars and edge computing.
The company's falling stock price has pressured its valuation, as it's now trading at just 7.3 times trailing earnings. Its payout ratio of 93% may appear unsustainable, but it belies several important considerations. The telecom industry is saddled with abnormally high non-cash expenses such as depreciation and amortization linked to its sprawling network infrastructure, which tend to skew the company's profitability. AT&T's dividends divided by its free cash flow for last year yields a much more reasonable 68%.
AT&T just raised its dividend by 2% to $0.50 per share. Investors can rest easy knowing that the company is a Dividend Aristocrat, having just raised its payout for the 34th consecutive year.
For investors looking for a high-flying dividend and the potential for future growth, AT&T is the right call.