Verizon (VZ -0.07%), the largest wireless carrier in America, has a great reputation as a dividend stock. It pays a forward dividend yield of 4.7%, and it's raised that payout annually for over a decade. But today, a trio of Motley Fool contributors will share three other solid stocks that pay even higher dividends than Verizon: Philip Morris International (PM -0.68%), Enbridge (ENB -2.94%), and Ares Capital Corporation (ARCC -0.35%).
Marlboro is still a moneymaker
Leo Sun (Philip Morris International): This tobacco giant's stock has tumbled more than 30% over the past 12 months after a streak of revenue misses compounded by tougher competition. British American Tobacco's (BTI -0.63%) takeover of Reynolds American helped it pass Philip Morris (PMI) as the top publicly traded tobacco company in the world, while PMI's brands have lost market share in Germany, Poland, Russia, Argentina, Mexico, and Saudi Arabia in recent quarters.
Despite those challenges, Wall Street expects PMI's adjusted revenue to rise 8% this year as its earnings grow 9%. That's because PMI, like its former parent Altria (MO -0.21%), constantly raises cigarette prices to offset shipment declines. PMI has also diversified its core business away from cigarettes with iQOS devices, which heat "tobacco sticks" to produce vapor instead of smoke. Several analysts believe that PMI could also acquire Altria to counter British American's takeover of Reynolds and reclaim its crown as the world's top tobacco maker.
PMI currently pays a forward dividend yield of 5.5%, and it has raised that dividend annually ever since it split from Altria in 2008. Those hikes should continue for the foreseeable future, since PMI spent just 84% of its free cash flow on its dividend over the past 12 months. PMI hasn't repurchased any shares in recent quarters, due to unpredictable foreign exchange headwinds. The stock trades at just 16 times this year's earnings.
Some investors might avoid PMI for ethical reasons. However, the stock's high yield and low valuation should limit its downside at these prices.
A cash-generating infrastructure giant
Chuck Saletta (Enbridge): Businesses that can continually pay strong dividends generally have moats of some sort that help protect their operations from excessive competition. After all, money paid as a dividend can't also be invested in ways to fend off competitors. That's a big part of what makes energy pipeline giant Enbridge an attractive dividend payer that pays you more than Verizon does.
Enbridge's dividend currently represents a yield around 5.8%, and the company has a long history of annual dividend increases when measured in the company's native Canadian currency. It has been able to deliver that dividend for a sustained period of time because it's largely in the business of building moats. Pipelines tend to attract opposition, and often, if one gets approved, expansions or additional lines are heavily opposed as well.
That gives incumbent players like Enbridge a huge advantage. They can profit from the pipelines they already have in place, with opposition to new capacity providing a big part of the buffer against competition. That allows Enbridge to generously reward its shareholders with a strong dividend from the cash it generates from shipping energy around.
Note that Enbridge is a Canadian company that pays its dividend in Canadian dollars. As a result, its dividend may fluctuate from quarter to quarter for U.S. investors because of currency fluctuations. In addition, unless those shares are held in an IRA, U.S. investors face a mandatory withholding tax on its dividends. Even with those tax and currency issues, Enbridge investors receive a strong dividend generated by strong operations in an incredibly crucial infrastructure-focused business.
Invest with the best
Jordan Wathen (Ares Capital Corporation): This business development company (BDC) makes its money by making high-risk, high-yield loans to private companies, most of which are in the United States. A unique corporate structure allows it to avoid corporate income tax when it pays out more than 90% of its earnings, resulting in a yield in excess of 9%.
Business development companies aren't for the faint of heart. They make their money by lending and investing in businesses that are generally too risky for banks, and too small for Wall Street. If risk and return are inherently linked (they are!), then the fact that its average loan yields about 10% per year is clear evidence that its borrowers are highly speculative, indeed.
But over nearly 14 years as a public company, Ares Capital's underwriting record has been exceptional. In most years, it has recorded negative credit losses, when gains on its winning investments exceeded the capital losses on its losing investments. Not only has it outperformed its peers, it has outperformed over longer periods of time.
The company's scale also imparts several key advantages. A large balance sheet enables it to borrow at lower rates than its peers, and makes it a go-to lender for private companies in need of debt financing. Furthermore, its size has also allowed it to be the industry's consolidator; it acquired two competitors, Allied Capital and American Capital, on privileged terms and at depressed valuations.
Trading at a slight discount to book value, Ares Capital is one of the few ultra-high-dividend stocks worth buying and holding.