Sometimes, a high dividend yield is a sign that investors are worried about challenges to a business that puts those payouts in jeopardy. Often, the market is right, but sometimes, it's slow to respond to improving conditions.
The three companies below all have yields of 4.5% or higher, a nice income stream at a time when treasuries are yielding next to nothing. Each of these businesses have faced challenges in recent years and months that have made investors nervous about them. They're all close to turning the corner, however, and investors are starting to warm up to them, again.
Better yet, the companies themselves have all recently signaled confidence in their futures by raising their payouts, something that dividend payers are very hesitant to do unless they think they can be sustained. Long-term investors can lock in high yields now with these stocks and look forward to further dividend increases in the future.
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1. Triton International
The trade war already was making conditions tough for global shipping companies in 2019, and then the pandemic hit in 2020. Container volumes plummeted in the second quarter, and shippers responded to lockdowns in Europe and the U.S. by significantly reducing vessel capacity.
All of that was bad news for Triton International (TRTN), the world's largest lessor of intermodal shipping containers, but the third quarter saw an unexpectedly sharp rebound in trade, and with it, the demand for containers. Container throughput in the world's largest ports is now above pre-pandemic levels, and Triton's business is booming.
The good times should continue. After years of oversupply, the shipping industry managed capacity carefully this year, with the effect of producing increases in shipping freight prices despite the dip in demand, and low fuel prices mean higher profit. The world's largest container shipping company, A.P. Moeller Maersk, has raised profit guidance twice in the last two months, forecasting higher global container volumes.
Triton's utilization rate -- the percentage of its container fleet leased to customers -- jumped from 94.8% in Q2 to 97.6% by mid-October, and a shortage of containers should support the utilization rate well into next year. Profit still isn't quite up to the level of a year ago, but adjusted earnings per share jumped 33% sequentially to $1.14 in Q3, beating analyst expectations by $0.08. Wall Street expects Triton to grow earnings per share (EPS) by 34% in 2021.
Triton recently increased its dividend 9.6%, saying it's confident in robust cash flows going forward. The shares are hitting 365-day highs, but still yield 5.4% and sell for 7.2 times analyst estimates for 2021 earnings.
2. AbbVie
Investors have been wary of pharmaceutical-giant AbbVie (ABBV -0.58%) because of competitive threats to Humira, the world's top-selling drug, which faces generic competition in the U.S. in 2023. As a result, the stock sells at a lower multiple of earnings and a higher yield than its peers, making it attractive not only for its dividends, but also as a value stock. It's no wonder that the most famous value investor of all, Warren Buffett, opened a position in AbbVie just last quarter.
AbbVie is taking the right steps to soften the blow of Humira's loss of exclusivity. The recent acquisition of Allergan diversifies the company into new therapeutic areas and will dilute the effect of shrinking Humira sales. Even more important are AbbVie's new-generation rheumatology drugs that will replace Humira. RinVoq and Skyrizi appear to be more effective than Humira and are being tested in all that drug's indications and more.
AbbVie could very well experience some quarters of unimpressive growth due to Humira losses, but the company also has a strong pipeline of cancer drugs and some neurology candidates that could be winners. All in all, AbbVie expects approval of over a dozen new products or major indications in the next two years.
Meanwhile, the company produces massive cash flow that it'll use for acquisitions and drug development. That's assurance for investors that the company can easily sustain a growing payout. The dividend has nearly tripled in the eight years since AbbVie split from Abbott Laboratories and now yields 5.3%.
3. Realty Income Corporation
A second wave of the COVID-19 pandemic has kept investors wary of real estate investment trusts (REITs) that lease their properties to retail businesses. Not only are there uncertainties around what consumers will do as COVID-19 numbers grow, but stay-at-home habits may endure long after the threat subsides. Realty Income Corporation (O -0.51%) is a high-quality retail REIT that should come through the crisis just fine, but a depressed price means that investors have an opportunity to lock in a high yield from this Dividend Aristocrat.
Realty Income has over 50 years of operating history, so the company knows how to navigate challenging times. Even though 85% of its rent comes from retail properties, most of the stores in Realty's top tenant categories -- convenience stores, groceries, drug stores, and dollar stores -- stayed open during the shutdown and haven't been as threatened by e-commerce alternatives. October rent collection was up to 93% and adjusted funds from operations per share, a measure of cash flow used to evaluate REITs, for the first nine months of the year was still up over 3% from 2019.
The issue for Realty Income is theaters, which are about 5.7% of rents, and to a lesser extent, health and fitness centers. The latter should eventually recover, but there almost certainly will be a long-term reduction in the number of theaters in this country. The company is being conservative and taking a charge against the 37 of its 78 theater assets it thinks could be at risk, but it has the financial strength to continue to grow and pay the dividend even with theater closures.
Realty Income pays its dividend monthly and has increased the payout every year since 1994. The stock yields 4.5%, with the share price 26% below its 365-day high, and is a good choice for conservative investors.
