With interest rates remaining fairly low for at least the near term, investors are once again seeking out higher-yielding stocks as a way to generate income from their portfolios. Still, high yields often bring along potential red flags, and when a company's yield is too high, it's often a sign that its dividend is about to get cut.
With that in mind, we asked three contributors to search the market for high-yielding companies that looked like they were legitimate deals, rather than value traps. They found AT&T (T +1.61%), Ford (F +0.76%), and Kinder Morgan (KMI +0.62%). Read on to learn why these companies stood out while others didn't.
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An overlooked American telecom
Nicholas Rossolillo (AT&T): AT&T plays second fiddle to Verizon in its primary market in the U.S., not exactly an enviable position in a hyper-competitive industry like telecom. Nevertheless, this telco is holding its own, and the stock pays a 6.6% dividend yield and trades at only 8.4 times price to free cash flow (from which dividends are paid).
The beleaguered stock could thus be a solid pick for investors looking for income. However, there's a reason AT&T trades at a discount to its peers. The wireless business continues to chug along at a decent pace (there were 179,000 postpaid subscribers added in the U.S. during the first quarter), but DirecTV and premium TV subscribers exited by the hundreds of thousands early in 2019. As for the TimeWarner acquisition that was made last summer, things are going well at the moment. Revenue and operating income grew 3% and 12%, respectively.
There's a lot riding on AT&T's new media assets, though. The company took on $40 billion in debt to acquire TimeWarner, and while asset sales and solid free-cash-flow generation have reduced total net debt by a few billion over the last handful of quarters to $164 billion, there's still a long way for the media conglomerate to go. There's no guarantee that will pan out, especially considering how competitive the entertainment and media space is getting. Verizon has already been backtracking on the media acquisitions it made a few years ago.
Nevertheless, AT&T shares look priced about right for the inherent risk in the business. There won't be much growth here in the years ahead, but the stock should be a stable one if the company can continue to pay down its massive debt burden. Plus, there's that fat dividend payment, which is easily serviced by AT&T's profitable operations.
A juicy Detroit dividend
Daniel Miller (Ford Motor Company): Over the past three years, General Motor's stock has moved 21% higher, while Ford's has tumbled over 30%. There are a couple of reasons for the price disparity between the two: GM has had solutions and strategies to sell well in China, while Ford watched 2018 China sales decline 37%; and GM Cruise is preparing to launch a driverless vehicle service in 2019, while Ford has lagged behind much of the competition with its driverless and electrified vehicle ambitions. Due to stumbles in China and uncertainty with driverless technology, Ford trades at a cheap 10 times price-to-earnings ratio and has a lofty 6.8% dividend yield -- but things could be changing.
Ford just announced it will be investing $500 million in electric vehicle start-up Rivian and will build a battery electric vehicle using Rivian's flexible platform. It's a good move for Ford for a few reasons: It shows investors it's serious about accelerating its electrified vehicle development, which will likely go hand in hand with driverless ambitions down the road. The development also helps Ford tie up a partner to help manage costs and development in an extremely competitive market that not only includes rival GM, but companies such as Tesla. As it currently stands, Ford's first long-range battery electric vehicle, a Mustang-styled crossover, won't be seen in showrooms until 2020.
Looking at Ford's China woes, which led to a 37% decline in Ford China sales during 2018, the company is planning to move away from its former cookie-cutter approach that failed to grip consumers in the region. Ford's new strategy in China will be to reboot designs in the region specially tailored for Chinese consumers, such as the 2020 Escape, which has a different front, with more intricate detailing in the grille and lamps as well as more chrome than what U.S. consumers will see.
Ford is cheap for a reason. It's failed to deliver a compelling electric vehicle or driverless technology strategy to investors, and it has struggled recently in the world's largest automotive market. However, it's taking steps to overcome those challenges, and at a 6.8% dividend yield, at least investors can bank on a juicy income.
The energy giant that is confirming it has its mojo back
Chuck Saletta (Kinder Morgan): The market punished energy pipeline giant Kinder Morgan for slashing its dividend in late 2015. Chastened by the experience, Kinder Morgan used the next few years to shore up its balance sheet and prove to the market that it could fund operations and much of its expansion plan internally. Having succeeded in that goal, the company publicly announced that it would be increasing its dividend by 60% in 2018 and by 25% in each of 2019 and 2020.
With its most recent dividend announcement -- a 25% increase from $0.20 per share per quarter to $0.25 per share per quarter -- Kinder Morgan showed it is capable of keeping to that plan. With its current dividend and a recent stock price of $19.86 per share, it sports a yield just above 5%. Assuming it keeps to its announced timeline and delivers another 25% dividend increase in 2020, a year from now, today's purchasers will have a yield on current cost of around 6.3%.
Of course, investors may feel skittish about trusting Kinder Morgan given its not-too-distant history of cutting its dividend. It's important to remember that even when it did make that cut, it could still cover its payout from its operating cash flow. It was excessive leverage on its balance sheet that ultimately drove the company to cut its dividend. Kinder Morgan used the time when it had that lowered dividend to shore up its balance sheet, making a similar cut less likely today.
Still, fears of another potential cut are part of what's keeping a lid on Kinder Morgan's stock price, providing the opportunity to buy its shares at what may very well turn out to be a reasonable bargain.
