Whether you prefer the steady income from a dividend stock to help balance the market's ups and downs, or you simply prefer to own stock in companies that have durable competitive advantages and steady cash flow, dividend stocks are a great investing option. Three Motley Fool contributors have identified three tantalizing dividend yields, and the risks that come with them, for January: Macy's (NYSE:M), Ford Motor Company (NYSE:F), and Wells Fargo (NYSE:WFC). Here's why.
An underrated retailer
Jeremy Bowman (Macy's): Macy's shares plunged earlier this month when the department-store chain reported underwhelming sales. Despite other reports showing it was the best holiday season for retailers in several years, Macy's said comparable sales increased just 0.7%, or 1.1% on an owned-plus-licensed basis, in November and December; management also trimmed its full-year guidance.
Shares sank 18% the day the report came out and have stayed down since then, but that reaction may have been overdone. After the sell-off, Macy's shares now offer an appealing dividend yield of 6%, and its shares are valued at a price-to-earnings ratio of just 6.3, based on its reduced earnings-per-share guidance for the year.
While the threats against brick-and-mortar retail are real, Macy's is doing a good job of adapting to them, investing in initiatives like its loyalty program, its off-price chain of Backstage stores, and e-commerce-based strategies like store pickup and Vendor Direct, which allows vendors to ship directly from its stores. After all, sales are still moving in the right direction.
In giving the stock such a low valuation, investors also seem to be forgetting about Macy's real estate portfolio, valued as high as $21 billion by Starboard Value, which includes prized flagship locations like the Herald Square store in Manhattan. Macy's has started to sell off assets strategically, but that only gives the company an advantage over competitors and acts as a bonus for investors.
While its holiday numbers may have missed the mark, the retailer is still much healthier than competitors like J.C. Penney, and Macy's should benefit from its rivals' retrenching. With a 6% dividend yield and billions of dollars in real estate waiting to be unlocked, Macy's is safer than it looks after the latest sell-off.
Is it time to be greedy?
Daniel Miller (Ford Motor Company): A great investor once advised investors to be fearful when others are greedy and greedy when others are fearful. If you take that advice to heart, and are willing to zig when others zag, Ford offers a 7.2% dividend yield at a meager 5.5 price-to-earnings ratio -- because investors are afraid of owning the automaker as the North American light-vehicle market begins to slow.
There's plenty of uncertainty surrounding Ford. The Dearborn automaker's China sales plunged 36.9% during 2018, and it recorded almost $200 million in losses in Europe through the first nine months of 2018. And who knows whether a possible trade war could make production more expensive at any given moment? Furthermore, at a time when General Motors has seemingly hit a home run with its driverless-vehicle unit, GM Cruise, Ford's strategy for driverless vehicles lacks direction.
Those concerns are why Ford is cheap, and why it boasts a 7.2% dividend yield. Despite the issues, investors with an appetite for risk and a long-term horizon could buy into Detroit's second-largest automaker and enjoy solid returns if it can turn business around. Ford's China 2025 plan will introduce over 50 new products by 2025, including eight all-new SUVs, which will give it a much fresher lineup and boost sales. In Europe, Ford plans to make product cuts, is considering exiting Russia operations, and will revamp its vehicle lineup and reduce costs by simplifying manufacturing.
All in all, Ford has some major restructuring to do, and management estimates the price tag will reach about $11 billion over the next three to five years. And right now many analysts won't touch the stock with a ten-foot pole. But if Ford can revive sales in China, become profitable in Europe again, focus on more profitable products as the U.S. auto retail market slows, and deliver a concrete driverless-vehicle strategy, it can offer investors a potential rebound and a juicy dividend yield in the meantime.
Get a big yield from this big bank
Jordan Wathen (Wells Fargo): This big-bank stock may not have many fans, but investors who take the long view will likely be rewarded with a steady stream of dividends and share-price appreciation on top.
Wells Fargo is currently stuck in a holding period. Last year, regulators took the unusual step of limiting the big bank to $2 trillion in assets until it proves that its sales practices have improved, but winning the hearts of those tasked to oversee it may take some time. Its fourth-quarter earnings report revealed that the bank now expects to have to stay below the $2 trillion asset cap for the entirety of 2019, if not longer.
That's the bad -- Wells Fargo can't and won't grow as most big banks do, by taking in more deposits and making more loans. But I'd argue that if the worst thing about a bank is that it can't grow, then the bad really isn't all that bad, after all.
Wells Fargo's valuation already reflects its no-growth situation, as shares trade at little more than 12 times earnings. Since the bank has no need to retain capital to support balance-sheet growth, it can send virtually all its earnings back to shareholders through dividends and share repurchases. Last year, the company rewarded shareholders with a 3% dividend yield while reducing its share count by 6%. A repeat could be in store for 2019.
Every dollar used to buy back stock at a discount merely sets the stage for a bigger return for shareholders when Wells Fargo gets approval to grow again. This big bank won't be stuck below $2 trillion in assets forever, but for as long as it is, shareholders can pick up a safe dividend yield that's 50% higher than the market average.
Daniel Miller owns shares of Ford and GM. Jeremy Bowman owns shares of GM and JCP. Jordan Wathen has no position in any of the stocks mentioned. The Motley Fool recommends Ford. The Motley Fool has a disclosure policy.