Many investors set aside a portion of their portfolios for income stocks -- those that pay a consistent dividend. This is a particularly good strategy in retirement, for extra cash, or to offset losses when the stock market turns south.
It can be tempting to look for the highest possible dividend yield (a company's annual dividend expressed as a percentage of the stock price). The S&P 500 currently yields about 1.5%, so if you want more income than that, you'll have to do some searching. Finding yields as high as 5% is even more difficult, as only a small percentage of stocks pay out yields that high. And not all of those are worth it -- a high yield can be a warning sign that a company is paying out too much of its earnings to shareholders, leaving itself vulnerable in hard times.
But dividend stocks that can sustain their high yields do exist. Here are two: Camping World Holdings (CWH 0.22%) and OneMain Holdings (OMF 2.56%).
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Camping World doubled its dividend with a yield of 5.4%
Camping World is a company that sells, rents, and services recreational vehicles, better known as RVs. Its stock has been on fire the past few years: Last year, it was up 89%, and this year it's up about 50% at Wednesday morning's prices. The company recently posted its fourth straight quarter of beating analysts estimates. In the second quarter, revenue was up 28%, gross profit rose 55%, and net income surged 51% year over year -- and these gains came on top of a strong quarter a year ago.
The company has surely been the beneficiary of the travel restrictions caused by the pandemic. While airlines and hotels have struggled, RVs have surged in popularity as people have sought out a safer way to vacation. The strong performance has allowed the company to increase its free cash flow and improve its balance sheet to "the strongest it's ever been," according to chairman and CEO Marcus Lemonis. Since the beginning of the year, the company has increased its cash position from $166 million to $191 million, and it sports a low net debt-to-EBITDA ratio of 1.14 -- this is a measure of a company's ability to pay off its debt, so the lower the number, the better.
As travel picks back up and returns to normal, will that mean a decline in RV use? It hasn't happened yet, as Camping World recently raised its earnings and revenue guidance for 2021. And as the market leader, Camping World is poised to capitalize on the growing RV trend with plans to open several supercenters, more aggressively pursue RV rental business, expand into merchandise, and grow its Good Sam membership network, which has over 2.1 million members.
And above all that, the company just doubled its quarterly dividend in the third quarter from $0.25 per share to $0.50. On an annual basis, the dividend will go from $1 per share to $2 a share, for a yield of 5.4% at recent prices. Even with the increase, it's paying out just 37.6% of earnings as dividends -- that's a very manageable payout ratio for a company on a growth trajectory.
OneMain offers a yield of 5% with big bonuses along the way
OneMain Financial, a subsidiary of OneMain Holdings, is the largest personal installment-loan company in the U.S., with 2.2 million customers and more than 1,400 branches in 44 states. It primarily caters to non-prime customers, who can't get traditional loans because of low to fair credit scores or some other reason. The company has been around for more than 100 years, in various iterations, working with customers on monthly budgeting and payment plans.
OneMain has had an excellent year coming out of the recession, with its number of loan originations spiking as the economy has improved. Loan originations totaled $3.8 billion in the second quarter, up 87% from $2 billion a year ago. Both the 90-day delinquency ratio and the net charge-off ratio -- loans that aren't expected to be paid back -- were down in the second quarter. Net income was up almost 300% to $350 million due to loan growth, higher interest income, and lower provision for finance receivables losses year over year. The company has high margins, with an operating margin of 56% and a profit margin of 40% with $1.7 billion in cash and $2.1 billion in operating cash. Its stock is up about 16% this year, just a little behind the broader market.
Even though OneMain has been around a long time, it only started paying out a dividend in 2019. But it's clearly shown its commitment to paying shareholders.
OneMain has grown its regular quarterly dividend 180% in a little over two years, and at Wednesday morning's prices, it yields 5% by itself. On top of that, the company has been paying a special dividend twice a year based on various criteria including earnings and excess capital. That special payout has escalated from $2 per share in the third quarter of 2019 to $3.50 in the same period this year. That dividend may not always be so high -- but combined with a generous regular dividend, consistent earnings, capital strength and high margins, this is a solid dividend stock. And with a low payout ratio of around 26%, there's plenty of capital for this company to continue to grow.
Here's the bottom line: Both Camping World Holdings and OneMain Holdings not only have ridiculously high yields, but are also growing companies that look like good buys right now.
