High dividend yields may be the holy grail of investing. There's no easier way to reap the rewards of saving your hard-earned cash than owning reliable stocks that pay juicy dividend yields. Finding consistent growers isn't always easy, however, as today's low-interest market has lifted stock valuations and pressured dividend yields.
Luckily, our contributors have searched far and wide and come up with three promising picks. Keep reading to see why they recommend STAG Industrial (STAG -1.86%), Vodafone Group (VOD -0.34%), and Philip Morris International (PM 1.39%).
Those quarterly checks add up. Image source: Getty Images.
An investment sandbox all to itself
Tyler Crowe: (STAG Industrial): Most people who invest in real estate investment trusts (REITs) tend to focus a lot on the type of real estate they own. Most investors want the kind of assets with multiple tenants, which helps mitigate the risk of a vacancy or two. What is often overlooked, though, is the management team making the investment decisions for those real estate assets. Management is one of the most compelling reasons to look at the industrial REIT STAG.
The kinds of assets that STAG looks at aren't typically well suited for investors; they tend to be single-tenant buildings like distribution warehouses, making the risk of vacancy high. When you have a portfolio of 360 such buildings, though, it drastically reduces the risk associated with a vacancy or two.
This gives STAG a unique advantage over other REITs, because it operates in a part of the industry where few other REITs and institutional investors participate. This means there's a greater chance of finding mispriced assets it can purchase at high capitalization rates (real estate lingo for valuation multiples -- the higher the better). STAG's management team has used its unique position as a large acquirer of industrial properties to become a high-yield business, and so far it has generated great returns for its investors.
With its dividend yield at 5.2% today, and a need for more and more distribution warehouses across the U.S. to help support e-commerce growth, STAG Industrial looks like a compelling high-yield investment.
Dialing for dividend dollars
Rich Smith (Vodafone): Phone companies have historically been a good place to look when seeking out high dividend yields. AT&T (T 1.88%), for example, pays its shareholders a rich yield of 6.1%, and has historically been considered one of the prototypical "widows and orphans" stocks. Verizon (VZ -0.53%), with a 4.6% dividend yield, isn't far behind in its attractiveness to dividend seekers.
But if you raise your sights just a bit, and peer across the pond, you might spy a telecom stock that will pay you even better: Vodafone.
One of Europe's biggest phone companies, Vodafone musters nearly all the profits it earns (94%) to pay its shareholders a rich 7.1% dividend yield. Granted, at 23 times earnings, the stock appears more expensive than AT&T or Verizon, both of which sport trailing price-to-earnings ratios of less than 7. On the other hand, there may be a reason why those American telecoms are valued so low. According to analyst estimates, they're only expected to grow earnings at 5% (AT&T) and 6% (Verizon) annually over the next five years. Vodafone, in contrast, is expected to grow at 18.5%.
The stock is also arguably cheaper than it looks. With only $3 billion in trailing earnings, Vodafone generated $10.7 billion in free cash flow, as traditionally defined (operating cash flow minus capital spending), last year. Even subtracting out the cost of purchasing "intangible assets" such as spectrum, free cash flow is still $6.7 billion -- more than twice reported earnings.
Long story short: Vodafone stock isn't as expensive as it seems, and its dividend is entirely as good as it looks.
A proven winner
Jeremy Bowman (Philip Morris): Tobacco companies have gotten a bad rap in some circles; after all, cigarettes are widely blamed for health problems like lung cancer and emphysema. Yet even while smoking rates have declined, tobacco profits continue to grow. Companies like Philip Morris have been able to pass along price increases to end consumers to make up for falling consumption rates, and new "heat-not-burn" products are growing fast enough to replace lost volume in cigarettes.
Philip Morris, which was spun off from Altria (MO 0.12%) in 2008, owns many of the same brands like Marlboro and Parliament, but sells them abroad, while Altria distributes them in the U.S. That may give Philip Morris an advantage over its sister company, as smoking rates are falling faster in the U.S. than the rest of the world. Altria, and therefore Philip Morris over most of that span, was the most successful stock in the world from 1968 to 2015, according to Wharton professor Jeremy Siegel: a testament to the high profits tobacco companies reap from an addictive product. Both have also been historically high dividend payers, and today Philip Morris offers a 5.5% yield, fresh off another dividend hike effectively making it a Dividend Aristocrat.
The next 50 years may not be as kind to tobacco stocks. Indeed, these stocks are broadly down this year, falling after Philip Morris said sales growth of its iQos product had slowed in Japan, a key market. However, overall shipment volume, of both cigarettes and newer products, was up in the past quarter; the company has a plan to boost sales of the iQos; and it's still eyeing growth of 8% to 10% in earnings per share this year.
The recent sell-off, therefore, gives investors an opportunity to buy shares of this reliable dividend payer at a discount, with the P/E at 17 based on this year's expected earnings.
