Even with an improving economy, many are sounding the alarm that a downturn may be coming, leading the Federal Reserve to take the position that there will be no rate hikes in the immediate future. Dicey economic times make an income-producing portfolio a solid choice because, over extended periods, stocks that pay dividends have typically outperformed those that don't.
Stocks with above-average yields are good candidates for achieving the best performance, and three Motley Fool contributors have picked AT&T (T 0.41%), AbbVie (ABBV 2.10%), and Harley-Davidson (HOG +0.57%) as stocks with dividends above 4% that could pay off in the long term.
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A fantastic dividend profile and overlooked growth potential
Keith Noonan (AT&T): With a yield of roughly 6%, AT&T has a top dividend in the telecommunications industry, but is it actually a top stock? The company's share price has climbed just 43% over the last decade and trades down roughly 20% over the last three years -- even with a nice rally in the first half of 2019. Factor the dividend in, and the stock has still lagged the total return of the S&P 500 index over the last one-year, five-year, and 10-year periods. But the telecom giant actually looks like a smart buy despite some weaknesses in the business that have contributed to that soggy performance.
Subscriber declines on the heels of its big acquisition of DIRECTV in 2015 and pricing pressure in the mobile space have clearly squeezed the company. Significant challenges remain, but these factors are also causing some investors to overlook the appeal of AT&T at present.
In addition to its big yield, 35-year history of annual payout growth, and safe payout ratios even as the company uses cash flow to pay down debt, AT&T stock has underappreciated comeback potential. If used wisely, the business' potent combination of media content and distribution channels, an emerging digital ad business with big potential, and strength in 5G and mobile wireless could power returns that far exceed the market's expectations.
Shares have climbed roughly 17% year to date. But because it's trading at just 9.5 times this year's expected earnings, AT&T is still a relatively low-risk stock that offers a great dividend and the chance to see share-price gains that shock the market if some of the company's growth bets pay off.
A Dividend Aristocrat with an unusually high yield
George Budwell (AbbVie): Dividend Aristocrats rarely sport yields on par with junk bonds, but AbbVie isn't your prototypical blue chip income stock. It's a Dividend Aristocrat by virtue of its former parent company, Abbott Laboratories, which spun off the biotech in 2013, seemingly to protect itself from Humira's forthcoming loss of exclusivity.
AbbVie has kept up Abbott's rich tradition of doling out regular hikes to its dividend, resulting in a sky-high yield that currently stands at a breathtaking 6%. That's the highest yield among all large-cap biopharma stocks at the moment. And if that wasn't enough to persuade you to consider AbbVie as a passive income vehicle, its shares are also trading at less than eight times projected earnings -- one of the lowest valuations among all dividend-paying healthcare stocks.
There are two noteworthy risk factors to consider with this high-yield dividend play. First, the biotech recently announced a $63 billion acquisition of Botox maker Allergan (AGN +0.00%), which will cause its debt load to balloon to an unsightly $73 billion once this deal closes early next year. Second, the biopharma's strategy to reduce its debt load post-transaction is predicated on the notion that Humira will remain a healthy cash cow in the coming decade. That's not a certainty. Humira's sales, after all, took a big hit following the introduction of biosimilars in Europe.
All told, AbbVie's enormous dividend yield and rock-bottom valuation should appeal to most income investors, but shareholders will definitely want to keep a close eye on its underlying fundamentals in the years to come.
Betting on a turnaround
Rich Duprey (Harley-Davidson): Motorcycle giant Harley-Davidson is in the midst of a turnaround, one that admittedly hasn't gained any traction yet in terms of new sales. It is in a four-year sales slump that will likely stretch to five before it begins to see any gains.
While that makes it hard to reconcile as a stock to buy, Harley is a very profitable business that has fiercely protected its margins to not devalue its brand. Although I've been critical at times of the motorcycle maker's policies, there are very early signs that Harley may eventually turn it around. And because the market is pricing the motorcycle company that owns half the market as if it were practically going out of business, its dividend -- yielding 4.1% at current prices -- makes it an attractive stock for income investors who have the patience to see if its strategy works.
Harley sales in the U.S. are falling. But it still records gains in foreign markets, and it wants to make foreign sales account for half of its total (today they're around 33%). It is building new, smaller motorcycles that international markets may find attractive, such as its recently revealed 336-cc bikes it will introduce into China. That may be the smallest motorcycle it's ever made, but one that may find willing buyers.
Harley-Davidson stock trades at 12 times trailing earnings, nine times this year's estimates, and at the bargain basement rate of 10 times the free cash flow it produces. The motorcycle king won't be a growth star, despite shares being up 7% year to date, but for those with an appropriately long investing horizon, it could be a good choice to rev up your income portfolio.
