If there's an upside to a down market, it's that when stocks fall, some of them eventually get cheap enough to start to look like bargains. When those stocks also pay a dividend, the market's sour mood might even occasionally open up opportunities to buy stocks that offer both a high current yield and a value price. Such chances usually only come around when things look to be near their worst, and it often takes an experienced investor to separate out the winners from the losers.
We asked three investors who have successfully navigated bear markets before to come up with high-yield stocks that look like they might be legitimate bargains today. They picked International Business Machines (IBM -0.89%), Verizon Communications (VZ 0.88%), and Broadmark Realty Capital (BRMK). Read on to find out why and decide for yourself whether the market's movements have made these the proverbial babies the market has thrown out with the bathwater.
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Growth, high yield, and cheap -- what's not to like?
Barbara Eisner Bayer (IBM): Ever heard of IBM? Sure you have! It's been a household name for three centuries. Founded in 1896 as the Tabulating Machine Company, it claimed the name International Business Machines in 1924. It was one of the greatest companies in the U.S. throughout much of its history, but when it missed opportunities to keep innovating by sticking to its mainframe computing business, it fell deeply off its perch.
After almost 10 years of watching its revenue decline, IBM finally took the bull by the horns and started reinventing itself into a cloud-computing and artificial reality (AI)-focused company. It acquired Red Hat in 2019, a company where 94% of its customers were in the Fortune 500. It also has an increased focus on its consulting arm and can boast of serving the top banks, automotive companies, telecoms, national governments, insurance, and healthcare companies around.
The "new" IBM began with the appointment of Arvind Krishna as CEO, who had previously been head of the cloud division. In November 2021, he engineered the spinoff of IBM's managed-IT infrastructure services division, Kyndryl, which was bringing the company down. That move is now enabling him to lead the company in the cloud computing market.
How much difference has this made? Since the spin-off, Kyndryl's shares have fallen 60%. It's a good thing for IBM investors that the company no longer has that elephant on its back.
IBM's latest fourth-quarter earnings report showed the impact of the release of Kyndryl. Revenue was up 6.5% year over year in the quarter. Hybrid-cloud revenue was up 16% year over year, and the company added an additional 1,000 clients to its hybrid-cloud offerings. In addition, revenue from its consulting division was up 13.1% in the fourth quarter, and the company anticipates continued growth in this segment.
It's great that IBM is now on a growth trajectory, but it's the company's dividend that makes it a great high-yield dividend stock to own. It's currently yielding 5.2% and is the only tech stock that ranks in the top 10 most generous dividend payers in the S&P 500. And on April 28, 2020, IBM became a member of the revered Dividend Aristocrats group, which means it has raised its dividend for at least 25 years in a row.
As for being beaten down, IBM is a poster child. With a valuation ratio of 12 times forward earnings, this growth stock is downright cheap. It's now trading at $128 a share, from an all-time high of $198.33, which was hit all the way back in 2013. The average analyst price target for the stock is $147.23, which implies a 14.61% upside from today's price, although one analyst sees its price reaching $185.
IBM is an established, well-known company that's putting its troubles behind it and entering a new wave of growth with a visionary leader. If you're looking for a company with an irresistibly cheap stock price, strong growth prospects, and an impressive high-yield dividend, IBM may be it.
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Calling on a 5% yield
Eric Volkman (Verizon): Over the past year or so, at various points, investors have gotten excited about stocks connected with electric vehicles, oil and gas companies, and anything having to do with cryptocurrencies. One sector few have happily jumped up and down about is telecommunications.
That presents a good opportunity to own what I've believed for some time is the best big telecom play out there: Verizon. It's down some distance from its nearly $60-per-share high over the past year, and when share prices go down, dividend yields go up. At the moment, Verizon's payout yields a rich 5%, which is one of the highest figures you'll see among blue chip stocks.
As a business, Verizon certainly deserves its blue chip status. Despite the gobs of capital it needs to spend to maintain and build out wireless capability -- and despite fairly sluggish revenue growth, now that everyone and their sibling owns a smartphone -- the company still manages to net a decent profit.
In fact its margins have been creeping up in the last few years, with annual net margin rising to 16.5% in 2021 from 2018's less than 12%.
The future looks excellent for Verizon, considering how hard it's driving to become the leader in 5G technology. This major wireless upgrade will give consumers the power to stream basically anything they want on their devices, making Verizon's services that much "stickier" and allowing the company to increase those margins with higher prices (not to mention sales of 5G-enabled devices, which still have encouraging room for growth).
The company is also fiercely dedicated to its quarterly dividend, having paid it without fail since assuming its present corporate form in mid-2000. It's also raised the payout, albeit marginally at times, every year since 2007.
5G isn't cheap or quick to roll out nationwide, but once Verizon's network is wide, deep, and established, I think the company's fundamentals will get a serious boost. We can expect the same for that generous dividend, as there will be more dosh in the coffers, and the telecom giant seems decisively and eternally determined to keep rewarding its shareholders.
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When money gets tight, hard money lenders get business
Chuck Saletta (Broadmark Realty Capital): Until late last year, Broadmark Realty Capital was in a fairly rare position of being a mortgage real estate investment trust (REIT) that did not have any debt of its own. It changed that policy back in November, taking on around $100 million in debt, which exposed it to new risks it hadn't been exposed to before.
The market didn't like that move, and between that new leverage and the general fear in place given the current economic and geopolitical environment, its shares have dropped since then. The thing is, though, that even with that debt, the company has a remarkably strong balance sheet for a mortgage REIT, with a debt-to-equity ratio around 0.1. In addition, with the Federal Reserve finally getting around to raising rates, the era of unreasonably cheap money may be coming to an end.
That could very well turn out to be a good thing for Broadmark Realty Capital. After all, the company makes its living as a hard-money construction-focused lender. The tougher conventional lending becomes, the higher the likelihood that higher-quality borrowers would need to reach out to hard-money lenders like Broadmark. Almost paradoxically, then, the Federal Reserve's tightening might actually provide a path to stronger results for the company.
Still, with a yield in the neighborhood of 10% -- and a dividend that's paid monthly -- Broadmark Realty Capital could now sit in that sweet spot of being both high-yield and potentially irresistibly cheap.
Most times when a company looks too good to be true, there's something seriously wrong with it. In this case, a combination of legitimate fear of the macroeconomic environment and the company's decision to take on debt for the first time may have spooked the market a bit too much. The risk/reward profile the stock now offers just might be a bit too good to pass up.
Has the market truly served up high-yield bargains?
IBM, Verizon, and Broadmark Realty Capital all offer investors decent yields, enabled in part by a market that has started off 2022 a bit spooked. Just as the stock market doesn't remain euphoric forever, it shouldn't remain scared forever, either. Now just might be the time to start looking for high-yield bargains among the carnage, and these three businesses make decent candidates for consideration.
