While record-low interest rates have been a boon for borrowers and anyone looking to refinance previously made loans, not everyone is smiling about cheap money. Investors looking to add more dividend stocks to their portfolio have found dividend yields right now to be a bit disappointing, reflecting the broad environment.
Not every dividend payer's yield has been driven into the ground, though. A handful of names still offer strong payouts compared to their stock's current price, and don't impose a huge degree of risk just to plug into that still-solid dividend payout. Here's a rundown of four of the best such prospects.
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1. Despite challenges, AT&T remains a cash cow
- Dividend yield: 7%
Telecom giant AT&T (T 1.10%) has seen better days. In retrospect, the 2015 decision to acquire DirecTV was probably a mistake, as that turned out to be the point when the cord-cutting movement got going in earnest. Finalizing the purchase of Warner Media only added to what's now become a massive $147 billion debt load that costs the company $2 billion in interest payments every quarter. This week's launch of streaming service HBO Max might help justify the Warner acquisition and somehow encourage subscribers to stick with at least one of AT&T's cable services, but the hurdle is a tall one indeed.
All of those risks may already be reflected in the value of AT&T's current stock price and then some. The company is still a cash-printing machine, reporting operating income of nearly $28 billion last year, up 7% year over year. Taking out the odd one-time expenses, AT&T regularly earns more than it dishes back out in the form of dividends.
The 30% sell-off between February and March says investors think the coronavirus contagion will gravely impact the company's bottom line. But the fact is, little has actually changed about AT&T's core mobility business. The only thing that's really changed is the stock's yield, driven to nearly 7% by the steep sell-off that's yet to meaningfully unwind.
2. Think of MPLX as a tollbooth
- Dividend yield: 13.9%
There are lots of familiar names on investors' mental list of potential dividend stocks to buy. MPLX LP (MPLX 1.17%) isn't one of them. Maybe it should be.
MPLX owns and operates a network of gas and oil pipelines. It also offers related services such as storage and processing. Energy stocks have been tough to own of late, of course, with West Texas Intermediate crude prices tumbling in March and then crashing in April. They're only a little better than half of their level hit in January, leveling off at less than $40 per barrel.
Pipeline players aren't nearly as subject to price volatility as explorers and refiners are. The midstream names like MPLX get paid to deliver gas and oil from point A to point B regardless of the price at which it's being sold. Barring a complete abandonment of the use of oil, pipeline companies will reliably be in demand and passing part of the per-barrel tolls they collect along to investors. MPLX's dividend now stands at 13.9% of the stock's present price. That oddly high yield leaves shareholders a little vulnerable to a lowered payout, though not overwhelmingly vulnerable. Remember, MPLX is mostly a tollbooth, and to the extent that it can, it's adjusting to suppressed oil prices. For instance, it's already lowered its planned capital expenditures for this year.
One caveat to be aware of is that MPLX is organized as a limited partnership, which means its payouts are taxed differently than conventional stocks because of the company's organizational structure and require additional form filings by shareholders that can add a little complexity at tax time.
3. International Paper was thrown out with the bathwater
- Dividend yield: 6.3%
International Paper (IP 0.31%) is one of many paper and corrugated box names that was hammered over the course of late February and early March thanks to the COVID-19 outbreak, even before investors had a chance to ask themselves why they were selling these particular names.
Yes, International Paper supplies several consumer-facing companies with packaging and boxing solutions, and the coronavirus crimped consumerism. On the other hand, it spurred fresh demand for cardboard boxes and paper grocery bags, with millions of people suddenly doing more online shopping from home and making extra purchases at grocery stores. International Paper's operating cash flow last quarter only slumped from $733 million to $649 million on a year-over-year basis. Operating profits tumbled from $600 million to $512 million. That's not bad given the broader downturn.
Shares have partially recovered from their setback. International Paper is up 30% from its March 23 low. That's still more than 20% below its February peak though, and nearly 30% less than its December high despite the fact that the company is starting to figure out the new normal. End result? A reliable dividend that currently translates into a yield of 6.3%.
By the way, International Paper has upped its dividend in every year of the past nine.
4. W.P. Carey is inconsistent, but worth it
- Dividend yield: 6.8%
Finally, add W.P. Carey (WPC 2.85%) to your list of dividend stocks with above-average yields to consider.
It's not exactly a household name, although there's a good chance you or someone in your household regularly uses its "product." W.P. Carey owns a huge portfolio of rental real estate, serving industries ranging from the self-storage market to hotels to schools to industrial facilities. No one tenant contributes more than 3.5% of its regularly collected rent, and one-third of its properties are located all across Europe. To the extent that diversity will help real estate investment trusts (REITs) in a post-coronavirus world, W.P. Carey's got plenty of it.
It's still a daunting idea to be sure. Companies and consumers alike haven't been bashful about not making rent payments in April, and May was an even tougher month for landlords. Like many other real estate investment trusts, shares of W.P. Carey paid the price in the face of the unknown, falling from a high near $89 in mid-February to a low near $42 by late March.
Things are slowly moving back toward normal, however, and any payments skipped by Carey's tenants up until this point should resume in the foreseeable future. Perhaps more compelling are the terms and types of leases W.P. Carey extends. Not only will its healthy mix of corporate and institutional customers resume their rent payments before consumers do, the company went into the COVID-19 outbreak with an occupancy rate of 98.8%. Nearly two-thirds of its contracted rent rates are also benchmarked to inflation, which means the REIT is already positioned for whatever sort of economic backdrop lies ahead. It's an arrangement that sets the stage for occasionally inconsistent rent increases that would be nice to impose. But, between W.P. Carey's current yield of 6.8% and the quality of the REIT's tenant base, a little inconsistency in quarterly results is worth it.
