With the market near all-time highs, and interest rates near all time lows, it seems finding industry-leading names offering fat dividends would be virtually impossible. It isn't, but you do have to tread into some riskier places to find them, like oil, malls, and a laggard technology company. But Total (TOT +0.00%), Simon Property Group (SPG 2.00%), and International Business Machines (IBM +2.44%) could be just what you are looking for, if you are trying to add some yield to your portfolio. Here's a primer on why.
1. Changing with the times
Based in France, international integrated oil giant Total is one of a small group of dominant global energy companies. Its yield today is an attractive 7.1%, though a part of that is because oil is in the midst of a downturn. The economic shutdowns used to slow the spread of the coronavirus pandemic are a big piece of that, but there's also the long-term transition the world is making toward clean energy to worry about.
Image source: Getty Images.
During Total's third-quarter earnings conference call, management stated, again, that it believes it can hold the dividend as long as oil averages around $40 a barrel. It is safely above that level now and only dipped briefly below that number during the worst of the pandemic. Meanwhile, oil and natural gas are so entrenched in the world economy that they will remain important for decades to come, even under more aggressive clean energy projections. Meanwhile, Total isn't sitting still; it is planning a gradual shift toward clean energy, changing along with the world around it. This, however, isn't a brand new trend for the company; it's been investing in electricity assets for some time.
All in, this out-of-favor energy stock is likely to muddle through the energy downturn and adjust to a clean energy world. Its dividend looks pretty attractive if you can sit tight through the current, difficult period.
2. A fragile system
The roughly 200 or so malls and outlet centers that Simon Property Group owns are more than just buildings -- they are a curated ecosystem. That's important, because even after the world moves past the coronavirus pandemic, Simon will still need time to heal its business. Essentially, it has to find the right mix of stores for every mall it owns. And the long-term shift toward online shopping, hyperbolically dubbed the "retail apocalypse," complicates that effort further. In fact, the combination of the pandemic and the ongoing retail apocalypse led Simon to cut its dividend in 2020.
But, in the third quarter, Simon's funds-from-operations (FFO) payout ratio was a solid 65%. That should provide ample cushioning for additional adversity. Thus, the 5.3% yield looks fairly sustainable, given that the third quarter was a rough one for the real estate investment trust (REIT). Another plus, meanwhile, is that Simon happens to be one of the best-positioned mall players, with among the largest collection of high-quality properties in the sector (meaning they are located in wealthy and populous regions). In addition, its balance sheet is also one of the strongest in the space.
Data source: YCharts.
Malls are down and out right now, but Simon looks like it will survive the current upheaval. And, based on the high-quality assets it owns, it should thrive, in time, once this rough patch is over. More aggressive dividend investors will likely find that appealing.
3. Big Blue's new trick
The last name up is IBM, a technology stock that has been going nowhere for years. In fact, the stock is trading at roughly the same level it was at the start of the millennium. The problem is that Big Blue has been trying to shift gears along with the fast-changing technology sector, but it hasn't been going particularly well. To be fair, it takes longer to change directions when the ship you are steering is as large as IBM. But investors are not a patient group, and they have moved on to other tech names.
The story is that IBM is shedding slower-growing and lower-margin businesses, like computer manufacturing, and shifting into faster-growing and higher-margin niches like cloud computing. It remains highly profitable and generates a significant amount of free cash, suggesting that it can easily support its dividend's 5.5% yield. That said, things are about to change in a drastic way.
IBM plans to spin off a legacy tech services business so it can focus more on its growing cloud operations. It could be an important growth catalyst for the company. The goal is for dividends from the two businesses to equate to the previous one offered by IBM. The spun-off operations, meanwhile, should be able to grow via acquisition, benefiting from the ability to now work with partners that aren't IBM. This is a bit of a special situation play at this point, but even the spun-off company will be a giant among its peers. This isn't a great option for conservative investors, but for those willing to take on a little more risk, now (before the spin-off) could be a good time to take a closer look.
No free lunch or crystal balls
There's a common saying on Wall Street that investing is an uncertain and risky endeavor. High-yielding Total, Simon, and IBM are all risky and come with a fair amount of uncertainty, but they are all industry leaders with substantial and sustainable businesses. If you can see past the warts, one, if not more, could be a solid addition to your dividend portfolio today.
