With the S&P 500 Index yielding a scant 1.5%, it has become increasingly difficult to find good companies with yields in the 4% range. But it's not impossible, as W.P. Carey (WPC +0.44%), The Southern Company (SO +1.44%), and Kellogg (K +0.00%) prove. Here's why each of these high-yielding dividend stocks should be on your radar screen today.
W.P. Carey: A great record and low risk
Real estate investment trust (REIT) W.P. Carey owns and leases single-tenant properties using what's called a net lease structure. That means that its lessees are responsible for most of the operating costs of the assets they occupy. And that (to somewhat oversimplify matters) leaves W.P. Carey to sit back and collect its rent checks. The net lease approach is relatively low-risk relative to REIT's that take a more active role in the day to day operation of the properties they own.
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W.P. Carey, however, takes things a step further in terms of risk reduction by layering diversification on top of that structure. Its portfolio of properties is broken down across the industrial (25% of rents), office (23%), warehouse (22%), retail (18%), and self-storage (5%) sectors, with a notable "other" category rounding things to 100%. And roughly 40% of its rents come from outside the United States. It's probably one of the most diversified REITs you can buy.
But what about that dividend? At current share prices, the yield is a generous 6.1%, and management has come through with a payout hike every year since the REIT went public in 1998. That streak includes four increases during coronavirus-stricken 2020. To be fair, last year's dividend hikes were extremely modest and mostly meant to be a statement of strength, which makes sense given the macro-economic backdrop. And for a yield that's four times what the S&P 500 Index as a whole is dishing out, well, income investors will probably be able to overlook that little negative.
The Southern Company: Solid record, but with a construction dilemma
Large U.S. utility The Southern Company serves 9 million customers, with electric operations in three states, natural gas distribution businesses in four states, and a merchant power business that sells electricity to others under long-term contracts. It has increased its payout annually for two decades. At its core, Southern is really just a boring old utility company -- that at current share prices is delivering an unboring 4.2% yield.
However, there's a wart here. The Southern Company is building a pair of nuclear power plants in Georgia, and the project hasn't been going particularly well. Cost overruns, delays, and the bankruptcy of its lead contractor (Westinghouse) were on the list of negatives before the utility stepped in and took over the project. Things had just begun to smooth out when the coronavirus upended things anew. The projected cost went up yet again, but Southern is working to get the first of the two plants done on the revised schedule, despite workforce issues related to the pandemic.
WPC Dividend data by YCharts
That said, for investors who are willing to stomach a little near-term uncertainty, Southern's yield is roughly 2.5 times that of the S&P 500 Index, and nearly a percentage point higher than the average utility, which currently yields roughly 3.3% (using Vanguard Utilities Index ETF as a proxy). And it is worth noting that, although its payout-hiking streak is "only" two decades long, The Southern Company has either held the dividend steady or increased it annually for more than seven decades. The pandemic and its big nuclear project are near-term headwinds, but this utility has proven it's a reliable dividend payer. And when those troubles are in the rearview mirror (hopefully, after the second reactor is scheduled to come online in late 2022), investors might just take a different view of Southern's prospects.
Kellogg: When bad is good
The last name up is a bit harder to love. Kellogg is a company you've probably heard of, given that its Frosted Flakes, Eggos, and other products are grocery store staples. The packaged food giant was actually pretty well-positioned for the early stages of the coronavirus pandemic, given that people were stuck at home and eating out less. But it couldn't keep up with all of the demand, so it didn't benefit as much as it could have. Growth started to slow after a quick burst, and now, investors have become worried that the company's longer-term growth plans aren't going to pan out. That's why its yield has been hovering around 4% lately (backed by 17 straight years of payout increases).
Technically, the yield is slightly below the 4% mark as this is being written, but that shouldn't stop you from looking at Kellogg today. Indeed, its yield is toward the high-end of the company's historical range, and it wouldn't take much of a price change to get it back to 4%. The negative sentiment here is material, too, because Kellogg is projecting a 1% organic sales decline in 2021. So not only did it fall short in terms of taking full advantage of last year's conditions, but slowing growth will continue into 2021 -- or will it?
At its core, Kellogg really is a slow-growth food stock. Calendar 2020 was a windfall year with 6% organic sales gains because of the pandemic. Normally, 2% to 3% growth would be looked at as pretty solid -- and when you adjust for the pandemic's impact, that's exactly the underlying trend management sees. So investors are, perhaps, reacting to the big picture without digging into the details enough to recognize the nuances that suggest Kellogg's growth plans remain on track. That makes the stock a better opportunity for investors willing to think outside the box.
These yields are worth looking at
There's no such thing as a perfect stock, so you have to take the bad with the good whenever you hit the buy button. However, W.P. Carey, The Southern Company, and Kellogg have all proven their dividend-paying abilities over time, have appealing dividend yields, and solid businesses. If you take the time to dig into these companies, you may well decide that one or more of them belong in your portfolio.
