Interest rates have crept up this year, and that has made dividend stocks a bit less attractive lately. Yet there are many stocks that pay well above the current annual yield on traditional income vehicles like Treasury bonds.
Below, three Motley Fool investors place the spotlight on three such stocks. British American Tobacco (NYSE:BTI), Verizon (NYSE:VZ), and Royal Dutch Shell (NYSE:RDS-A), each pay over 4% in annual yield and could make attractive buys today.
Put this stock in your pipe and smoke it
Rich Duprey (British American Tobacco): Although it is a mighty global player in a dying market, British American Tobacco remains a formidable investment, one that may still successfully transition to the next stage of growth. That makes this dividend payer a stock income-seeking investors ought to consider.
Cigarette smoking, of course, is in the midst of a secular decline, and the industry is taking pains to devise ways to prolong cigarettes' relevance. The latest technology could be a way both smokers and tobacco companies profit.
The rise of electronic cigarettes, vaping, and heat-not-burn (HNB) technology all may be healthier alternatives for smokers who switch from traditional, combustible cigarettes. A number of major global health organizations have endorsed the use of e-cigs as a transitional technology, even if not smoking at all in any form would be best.
Philip Morris International has taken a leadership role in advancing the HNB alternative with its iQOS device, which has taken Japan by storm and is awaiting approval in the U.S., but British American has its own competing device in the iGlo Fuse, along with numerous other products along the smoking continuum, including non-smoking products like snus and snuff. Over the past five years, it has invested some $2.5 billion in these next-generation products, and it is looking to realize revenue of 1 billion pounds from them by the end of 2018 and 5 billion pounds by 2022.
With this commitment to not only surviving smoking's demise, but thriving, British American Tobacco's 5% dividend yield is a unique opportunity with a stock that trades at just three times trailing earnings and 13 times next year's estimates. With its long-term earnings growth rate only a tiny fraction of its price-to-earnings ratio, this stock offers income and growth in one package.
Modest growth paired with strong income
Demitri Kalogeropoulos (Verizon): Verizon's core wireless niche is mature, so the company is only expected to increase sales by about 2% per year over the next few years. That's the bad news. The good news is that the telecom giant could see significant improvements to its business after it rolls out its 5G offering in the next year. Besides the increased customer satisfaction the service might bring, its high performance level should allow it to boost pricing in a competitive market as internet-connected devices proliferate and begin demanding even more bandwidth.
Sure, it will be difficult to move the needle on a business that last year booked $126 billion in revenue. And Verizon's operating model is anything but capital-light. In fact, business investment spending is slated to rise to almost $18 billion this year, compared to $17.2 billion in 2017. The company's healthy cash flow easily covers those outlays, though, while protecting a dividend that's increased for 11 consecutive years. Put it all together, and this telecom giant offers a balance of income and potential upside that many conservative investors might find attractive.
Big oil meets big dividend
John Bromels (Royal Dutch Shell): The integrated oil majors have always paid high dividends, and Royal Dutch Shell is no exception. But Shell is currently yielding about 5.44%, the highest among its oil major peers (although BP's 5.38% yield comes awfully close).
What may surprise you is that Shell's yield is actually down significantly from a year ago, when it topped 7%. That was thanks to oil prices, which seemed stubbornly stuck around $50/barrel: just enough for the oil majors to eke out a small profit thanks to their refining and marketing operations. Today, with oil prices topping $70/barrel, things are looking a lot more rosy for the industry -- and especially for Shell.
Shell's cost-cutting during the oil price slump now has it sitting pretty, as its most recent quarter, Q1 2018, attests. Quarterly revenue grew by 24.2% year over year, to $89.2 billion, while quarterly net earnings were up an impressive 66.7% over the prior year.
As long as oil prices remain this high, Shell should continue to outperform, and a promised share repurchase program could reward investors even beyond the company's generous dividend. That makes now a great time to pick up shares.
Demitrios Kalogeropoulos has no position in any of the stocks mentioned. John Bromels owns shares of Verizon Communications. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.