The U.S. economy is still humming along right now, but increasing talk about a potential recession and how it could affect the stock market may have some investors looking to high-yield dividend stocks to weather a potential storm.
To help investors track down some of the top dividend stocks, we asked three Motley Fool contributors for some ideas, and they came back with Chevron (CVX -1.41%), Iron Mountain (IRM 0.23%), and AT&T (T -0.36%). Here's why.
A rock-solid integrated oil and energy play
Nicholas Rossolillo (Chevron): Oil is in retreat, spurred on by fears of trade war and geopolitical disputes, global economic slowdown, and that dreaded "R" word: recession. A U.S. oil inventory build hasn't helped matters. Since their most recent peak in April, oil prices are down nearly 20% and off nearly 30% from the autumn of 2018.
When it comes to investing in energy, I like to keep it simple. Chevron is one of the largest and most recognizable names in the business, and there isn't much to write home about here. Unless, of course, you're interested in slow and steady returns on invested capital and high-yielding dividends propped up by steady cash generation. Higher is better, but even when oil prices are down, Chevron does just fine, thanks.
The integrated oil company, which does everything from exploration to refining and distribution, has been getting about an 8% return on invested capital in the last year as the energy industry continues to rebound from the rout of 2014-15. Free cash flow (money left over after basic operating and capital expenditures are paid) is also back to all-time highs, flowing at $18.5 billion over the last trailing 12 months. That ensures Chevron has money on hand to keep funding its share repurchases, growing its dividend, and investing in new energy development projects.
Due to the recent downturn in the stock market, Chevron's dividend yield has been pushed up to 4.1%. Though oil and gas isn't exactly a growth industry, the energy giant is a steady hand that is still finding ways to generate profitable growth and healthy investor returns -- no matter which direction oil prices decide to head next.
A rock solid dividend stock
Daniel Miller (Iron Mountain): Income investors searching for stocks boasting dividend yields over 4% should look into Iron Mountain, a company that generates most of its revenue from storage and information management. Iron Mountain is a real estate investment trust (REIT) and is required to return 90% of its taxable income to investors via dividends. Currently its dividend yield has increased for nine consecutive years and sits at an enticing 7.67%.
One factor to keep in mind when considering dividend stocks is the company's competitive advantage. After all, what good is Iron Mountain's current juicy dividend yield if its business and taxable income spiral lower? That brings us to one intriguing advantage Iron Mountain has: switching costs.
Many large customers pay Iron Mountain for (among other services) storing their important and cumbersome original documents, and it's not easy to just switch that business to a competitor. It's costly to switch because, according to data from Morningstar.com, carton storage per cubic foot per month is roughly between $0.10 and $0.22, while retrieving and/or moving costs a one-time fee in the range of $1.65 to $2.77 per cubic foot as well as a one-time handling fee between $0.52 and $0.83 per cubic foot. Because of the costs and the time it takes a customer to switch storage providers, Iron Mountain boasts a 98% customer retention ratio -- pretty impressive.
Despite exchange rate headwinds, the company's second-quarter result was an improvement over a disappointing first quarter, and management believes things will continue to improve during the second half of 2019. One thing for investors to watch for is if management can achieve its goal of generating 30% of total sales from growth opportunities and adjacent markets by the end of 2020. If management can meet its growth goals while offering investors a juicy dividend yield, Iron Mountain is a top dividend stock to dig into.
The telecom that's now a media giant
Chris Neiger (AT&T): AT&T is best known as a telecom giant, and the company still has potential to grow in this area. 5G technology, the next-generation standard for cellular communication, will bring faster speeds to mobile devices and allow all sorts of new services through Internet of Things devices.
AT&T will benefit as it brings more 5G markets online this year and over the next few years, and as 5G services grow into a $123 billion market by 2025.
But it's not just 5G that will help AT&T grow. The company's purchase of Time Warner, which gave the telecom ownership over Warner Bros., HBO, Turner Broadcasting and other content, has turned AT&T into a major media player. The purchase is particularly important now, as the competition over video content ownership and online streaming is heating up. AT&T is taking advantage of its new content ownership by creating its own streaming service to tap into users' seemingly unquenchable thirst for streaming shows and movies.
Of course, investors will be happy to know that in addition to the company's 5G and media streaming opportunities, AT&T also pays a dividend yield of 5.8% and its stock trades at just 10 times the company's forward earnings. All of which means that for investors looking for a top dividend stock with a high yield and lots of long-term potential, AT&T may just fit the bill.