Rising interest rates can throttle demand for dividend stocks, but it would be a bad idea for investors to sell all of their dividend stocks on these cyclical dips. Today, three Motley Fool investors discuss a trio of rock-solid stocks with yields exceeding 5%: AT&T (NYSE:T), Omega Healthcare Investors (NYSE:OHI), and Oaktree Capital Group (NYSE:OAK).
A classic dividend aristocrat
Leo Sun (AT&T): AT&T is the top wireline services provider, second largest wireless carrier, and biggest pay TV provider in the United States. Its acquisition of Time Warner also makes it one of the top media companies in the world.
AT&T faces slowing growth in wireless subscriptions, due to the saturation of the smartphone market, and a loss of pay TV subscribers to over-the-top services like Netflix. To counter these disruptive threats, AT&T is bundling its wireless, wireline, and pay TV packages, and offering data-free video streaming services with some of those plans.
It's also launching new wireless plans for connected cars, wearables, Internet of Things devices, and other gadgets. Like its rival Verizon (NYSE:VZ), AT&T hopes to generate fresh revenue from its expanding portfolio of internet advertising services. None of these moves will turn AT&T into a growth stock, but analysts still expect its sales and earnings to grow 8% and 11%, respectively, this year. Those are solid growth rates for a stock that trades at just nine times forward earnings.
AT&T currently pays a forward dividend yield of 6.1%, which is much higher than Verizon's 4.6% yield. It spent 39% of its earnings and 66% of its free cash flow on that payout over the past 12 months, so it has plenty of room to maintain its three-decade streak of dividend hikes.
A business well positioned for the future
Chuck Saletta (Omega Healthcare Investors): According to census projections, the U.S. population is expected to continue growing over the next several decades, with the over-65 population projected to drive the largest part of that growth. Behind those trends is a combination of longer life expectancies and lower birth rates.
More seniors combined with fewer children leads to a need for more elder care. Traditionally, elder care responsibilities have fallen on the aging person's offspring. As the number of seniors increase and they have fewer adult children to care for them, the higher the likelihood that they'll need professional help as they age. That's where Omega Healthcare Investors shines.
Omega Healthcare Investors is a real estate investment trust (REIT) that supports assisted-living and skilled-nursing facilities, owning and leasing the buildings that many of those operations use. It's currently profitable, and as a REIT, it must pay out at least 90% of its earnings in the form of dividends. In large part because of that structure, its yield currently sits above 8%, thanks to its quarterly dividend of $0.66 per share.
While that yield is tempting and the long-run demographic trends are favorable for its business, there are risks in investing in it. Most notably, one of its clients recently defaulted, forcing Omega Healthcare to restructure the related properties it owns. That client-driven issue caused Omega Healthcare to pause its dividend increases, but it does still expect its dividend to be covered by its funds from operations, even with that issue.
This high yield can diversify your portfolio
Jordan Wathen (Oaktree Capital Group): Nearly a decade into a persistent bull market, bargains are few and far between. That's been a problem for Oaktree Capital Group, an alternative asset manager that primarily makes its money as a fund manager that invests in the most speculative borrowers.
Led by legendary investor Howard Marks, Oaktree made its name investing in messy situations, carving out a niche as the go-to distressed-debt firm. Its unmatched performance gives it pricing power; its clients pay both an ongoing management fee plus incentive fees for investing in its funds.
The management fees keep the lights on, but the incentive fees are what really boost the bottom line. When Oaktree earns large profits for its clients, it takes a share (typically, 20%) for itself. But relatively calm markets have weighed on profitability, as the company is finding few bargains in which to deploy its clients' cash.
Including its share of assets under management at DoubleLine, a bond manager in which it is a minority investor, Oaktree has about $120 billion of client assets under management. Roughly $20 billion is sitting around doing nothing -- money it calls "dry powder."
For now, Oaktree's dry powder is an earnings drag. But if the credit cycle turns, this cash will quickly become a source of future profits. This is what I like most about Oaktree. Whereas other high-dividend stocks are cyclical, I'd argue that Oaktree is counter-cyclical. Its business gets better when every other business turns for the worse.
At recent market prices, you could lay the case that Oaktree trades for close to a single-digit multiple of its earnings power. A low valuation, together with a 10% yield (though a volatile one), is hard to beat.
Chuck Saletta has the following options: long January 2020 $27 calls on Omega Healthcare Investors, short January 2020 $27 puts on Omega Healthcare Investors, and short September 2018 $26 puts on Omega Healthcare Investors. Jordan Wathen has no position in any of the stocks mentioned. Leo Sun owns shares of AT&T. The Motley Fool owns shares of and recommends Netflix and Oaktree Capital. The Motley Fool has a disclosure policy.