For investors looking for a sizable dividend, tech giant International Business Machines isn't a bad place to start. It has an above-average yield of about 4.3%, has been paying its dividend every year consecutively for over a century, and is spending only about half its profits to support the payout.
As appetizing as that dividend is, there are other companies that offer an even tastier yield. With that in mind, we asked three Motley Fool investors to choose top companies that would provide investors an even more generous payout. They offered compelling arguments for National Retail Properties (NYSE:NNN), Energy Transfer Partners, LLP (NYSE:ETP), and DSW Inc. (NYSE:DSW).
The death of retail has been greatly exaggerated
Danny Vena (National Retail Properties): It can be difficult to find an investment that ticks all the necessary boxes, offering a compelling yield, consistent growth, and a long history of payments. Investors can simplify that task within a special classification of tax-advantaged companies that qualify as real estate investment trusts (REIT), which are required to pay out 90% of profits to shareholders in the form of dividends.
National Retail Properties operates under such a structure, and has a diversified portfolio of over 2,800 investment properties in 48 states, and those house more than 400 tenants across 37 different industries.
With all the talk of a "retail apocalypse" and the ongoing adoption of e-commerce gathering steam, you might think that simply the inclusion of the word "retail" would send up red flags. Fortunately, there is still a group of retailers that are more or less immune to the threat of e-commerce, those that simply don't lend themselves to online sales -- think gas stations, movie theaters, fitness centers, convenience stores, and restaurants. These businesses make up the bulk of National Retail Properties' tenants.
Beyond the disruption caused by e-commerce, the company uses other methods to ensure the stability of its payouts. Its customers sign long-term leases that contain provisions for automatic rent increases and typically run for between 15 and 20 years. The average property in its portfolio has a remaining lease term of 11.4 years and its occupancy rate is currently over 99%. Tenants also pay for ongoing costs like utilities, maintenance, insurance, and property taxes.
Of more than 10,000 publicly traded companies, National Retail Properties is one of only 88 that have increased their annual dividend payment for 28 or more consecutive years -- making it a Dividend Aristocrat. Speaking of the dividend, the payout currently yields an impressive 4.8%.
The impressive yield, built-in growth, and an elite record of payouts makes National Retail Properties a better option than IBM.
Sky-high yield, but higher risk too
John Bromels (Energy Transfer Partners): Sure, IBM's yield of 4.3% seems pretty high... that is, until you compare it to master limited partnership (MLP) Energy Transfer Partners, whose yield is nearly three times as high, at an incredible 12%! But before you rush out to buy some shares, there are a couple of things you should know.
The first is that MLP ownership can cause you some headaches at tax time. MLPs receive special tax treatment by the government in exchange for paying out all their earnings as distributions to their unitholders. The trade-off is that those unitholders usually have to jump through some extra hoops -- including filling out extra forms -- for the IRS.
Beyond the tax issues surrounding MLPs in general, Energy Transfer Partners is a riskier proposition than stalwart IBM. Even though the company operates more than 71,000 miles of pipelines across the U.S. and has a well-established yield -- not to mention a history of increasing that yield on a regular basis -- Energy Transfer Partners has a balance sheet that's highly leveraged, and a checkered history of distribution coverage. But things are looking up for the company.
It's not unusual for an energy infrastructure MLP to carry a lot of debt. In fact, most of Energy Transfer Partners' peers have debt ratios of more than four times EBITDA, so its ratio of 4.5 times is in line with its industry. The good news is that its debt ratio has fallen sharply since early 2016, and last year management made some savvy moves to pay down more-expensive debt through asset sales and take on some less-expensive debt in return.
As for its distribution coverage, while it was razor-thin for most of 2017, management surprised investors in Q4 2017 by reporting a distribution coverage ratio of 1.3 times, which is a very comfortable margin -- although it had a bit of help from parent Energy Transfer Equity. It followed that up with a still-comfortable coverage ratio of 1.15 times in Q1 2018 with even less help from its parent, so things seem to be moving in the right direction.
Although the risks are still there, the company's mouth-watering yield and recent outperformance make it a top choice for investors looking for dividends to put IBM's to shame.
Lace up for an almost 5% yield
Demitrios Kalogeropoulos (DSW): Things are looking up for shoe retailer DSW, as a 1% sales boost over the holiday quarter helped it recently achieve its first annual earnings increase since 2013. Reduced promotions, healthy customer traffic, and cost cuts all contributed to the improving finances that allowed the chain to generate $123 million of profits in 2017 for a 4% boost over the prior year.
Its core footwear business has expanded in each of the last three quarters, which suggests DSW's operations might finally have turned the corner following a string of difficult results. Now it's up to the management team to ensure that this positive momentum continues into 2018 and beyond.
On the down side, income investors don't have an impressive dividend track record to count on for this stock, since the annual payout held steady at $0.80 per share in fiscal 2015 though fiscal 2017. However, management recently demonstrated -- with a 25% hike -- that they're prepared to send more cash to shareholders while operating and financial trends are headed in the right direction. The new $1 per share payout equates to an almost 5% yield. It is well covered by expected earnings, meanwhile, as DSW believes the business will generate between $1.52 and $1.67 per share in profit this year.
Danny Vena has the following options: long January 2019 $165 calls on IBM. Demitrios Kalogeropoulos has no position in any of the stocks mentioned. John Bromels has no position in any of the stocks mentioned. The Motley Fool is short shares of IBM. The Motley Fool recommends DSW. The Motley Fool has a disclosure policy.