In today's low-interest-rate environment, it is very challenging to get decent income from your investments. Even looking out as far as 30 years, U.S. Treasury bonds recently offered interest rates below 2%. That makes stocks with yields above 3% particularly tempting. After all, unlike fixed-rate Treasury bonds, stock dividends have the potential to grow over time -- as does the price of the underlying stock itself.
That means that in the current market environment, the right set of stocks can offer you both higher income and better growth than bonds. You are taking on higher risks with stocks, however, as those dividends are not guaranteed payments. As a result, you'll want to look not only at how large a company's dividend is, but also at how sustainable it could potentially be. With that in mind, here are three stocks to consider buying with dividends yielding more than 3%.
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Where people store their stuff
Extra Space Storage (EXR 1.69%) is a leading company in the self-storage business. It's a remarkably straightforward business that tends to generate cash for its owners. Extra Space Storage provides the secured storage facilities, and people fill their spaces with their stuff and pay the monthly rent on the space. Operating costs are fairly low -- the company reported a 70% gross margin in its most recent quarter -- and the business tends to have both reasonable retention rates and decent recession resistance.
From a dividend perspective, Extra Space Storage is structured as a real estate investment trust (REIT), which means it must pay out at least 90% of its earnings as dividends to its shareholders. That structure and requirement mean that as long as its business remains profitable, its shareholders can expect a decent dividend from it.
The company's yield currently sits around 3.1%, and the dividend is well covered by its operating cash flow, even with the COVID-19 pandemic raging. That speaks well for Extra Space Storage's ability to survive the remainder of the pandemic and potentially resume increasing its dividend as it wanes.
A business critical for national security
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Lockheed Martin (LMT -0.44%) is best known for its military aircraft and weapons systems. Those products play a vital role in America's national security. While politics are involved in defense spending decisions, over time -- in both wartime and peacetime -- spending tends to go up. That gives a better level of certainty to Lockheed Martin's revenues than would normally be implied by its relatively low price-to-earnings ratio of below 14.
Especially at a time when both Russia and China are developing hypersonic missile delivery systems, Lockheed Martin's work in that area is critical to assuring America's defenses are adequate. Development in advanced technologies is likely to continue even if the country isn't at war, as deterrence remains a key military strategy. For the country to have a reasonable deterrent, it needs credible weapons.
From an investor's perspective, Lockheed Martin offers a yield of around 3.1% that consumes about 40% of the company's earnings. That reasonable payout ratio, along with modest earnings growth projections over the next few years, provides reason to believe the dividend can continue and possibly even rise over time.
A company known for innovating in lots of spaces
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3M (MMM 0.31%) can boast tens of thousands of products across dozens of separate categories. That broad reach includes everything from its famous Post-it Notes to its less known but still critically important Littmann Stethoscopes. That kind of breadth -- driven as it is largely by the company's own innovation -- means that 3M is well positioned to thrive almost no matter what comes next in the economy. It simply has the ability to create solutions to serve many of the market's evolving needs.
Of course, that broad scope of products also comes with a downside. While 3M has what it takes to adapt to the future, it also owes a lot of its existing revenues to products that already serve mature markets. As a result, analysts expect only modest growth from the company over the next several years. Fortunately for potential shareholders, the market recognizes these prospects and is charging a fairly reasonable price of around 18.6 times next year's expected earnings for 3M's stock.
That valuation means 3M can offer its shareholders a decent 3.3% yield, even as it retains a touch over 36% of its earnings to reinvest in its growth. The company did recently authorize a tiny increase to that quarterly payment, so shareholders have good reason to believe that it will be able to keep making its payments even in the current environment. Hopefully, as the pandemic eases, 3M will be able to speed up increasing the rewards of ownership its shareholders see.
Income today, potential growth in the future
Extra Space Storage, Lockheed Martin, and 3M all have vastly different operating models. What they all have in common is that they're dividend stocks that are offering their shareholders decent current incomes and also have the potential to increase that income over time. In today's low-interest-rate environment, you could do worse than to look at these three businesses for a combination of dividends today and the possibility of decent total returns over time.
