With a 3% yield and a 46-year streak of annual payout growth, it's no wonder that PepsiCo continues to be a staple of many income-focused portfolios. The company has built a massive global distribution network and a diversified lineup of billion-dollar snack and beverage brands that should help it to keep cash flowing back to shareholders, but it's not the only great income play that investors should keep an eye on.
We asked three of our Motley Fool contributors to spotlight a company that pays even bigger dividends than Pepsi and stands out as a worthwhile portfolio addition. Read on to see why they identified Kohl's Corporation (NYSE:KSS), Carnival (NYSE:CCL), and AT&T (NYSE:T) as high-yield stocks that deserve your attention.
Invest in this family favorite?
Rich Smith (Kohl's Corporation): I'll tell you an investing tip I learned early on: Check your credit card bill every month. If you find a company name on there where you -- or your spouse or your kids -- are racking up multiple hundreds of dollars in charges, that might be a good place to invest. And if that company happens to pay a dividend, why, then that also gives you a chance to get back a little bit of the money you are spending every month.
In my family, that company is Kohl's, which is apparently our go-to store for buying clothes for the kids. (I don't know for sure -- I don't do the clothes shopping around here. But that's what the numbers tell me.)
What I do know, when I look at the numbers on Kohl's stock, is that this is a stock selling for less than 15 times earnings (the average stock on the S&P 500 costs 22 times earnings) despite being pegged for 10% earnings growth, right around the market average. It's a stock that generates nearly twice as much free cash flow as it reports as GAAP earnings -- $1.5 billion versus $801 million, according to S&P Global Market Intelligence.
Oh. And it's a stock that pays its shareholders a generous 3.8% dividend yield -- about 27% more than Pepsi does.
Cruise to a higher yield
Demitri Kalogeropoulos (Carnival): Cruise leader Carnival isn't steaming ahead these days. Instead, the company's growth rate has dropped to below 1% in 2019 from the 3% or higher that investors have enjoyed in recent years. But that slowdown doesn't mean shareholders can't reap big rewards from owning this high-yield dividend stock.
Demand is holding up well as vacation bookings are on pace to generate another record year for passenger volume amid steady prices. Sure, Carnival is getting more of its sales gains from a rising capacity rather than the soaring ticket volumes of past years. That's a consequence of sluggish industry growth. But it's also a more stable way to expand sales.
In the meantime, CEO Arnold Donald and his team are targeting continued improvements in key financial metrics like profitability, cash flow, and return on invested capital. More wins here will allow Carnival to keep firming its leadership position in the industry while also producing lots of excess cash the company can direct toward bulking up its $2 annual dividend that today yields almost 4%.
Big, dependable dividend at a discount
Keith Noonan (AT&T): With cord-cutting squeezing its TV business and tough competition in the mobile wireless space, AT&T is facing some significant challenges. However, the stock still stands out as a top candidate for income-focused investors seeking big yield at a discount. Shares sport a 6.5% yield, and with 34 years straight of annual payout growth under its belt, few companies have a better track record when it comes to dependably increasing the size of checks cut to shareholders each year.
AT&T's huge yield and great payout history might not be worth much if the business couldn't be counted on to thrive over the long term. That said, there's a good chance the company will be able to leverage its strengths across telecommunications categories to take advantage of growth for connected devices and service demands that will stem from Internet of Things technologies and the rollout of 5G networks.
AT&T is also moving forward with a much bigger entertainment content business courtesy of its acquisition of Time Warner, and the opportunities created by the company's newfound strength in entertainment still seem underappreciated. Its assets now include HBO and standout properties including the Game of Thrones universe and True Detective; big movie franchises including Harry Potter and Batman, Wonder Woman, and other DC Comics properties; a range of television networks; and a video game publishing wing. So, while the company's DirecTV business is facing declines, the Warner assets should bolster AT&T's moves in the streaming space -- and the telecom giant's position in mobile wireless opens up new targeted-advertising opportunities.
A wide range of assets is coming together to create "the new AT&T." The telecom company that's long had a reputation for being a boring investment has some exciting story lines brewing beneath the surface, and the stock looks cheap trading at roughly 8.5 times this year's expected earnings and sporting a huge yield.