High dividend yields can be a sign that the market's not confident a company can afford its dividend. This is sometimes called a yield trap. But just like most things in life, there are exceptions to the rule.
If you're looking for a stock that can pay you a high yield, say five percent, read on. Here are three stocks with sustainable high-yielding dividends that are attractively priced to buy right now.
1. An old-guard technology company with some new tricks
International Business Machines (IBM 1.26%), which commonly goes by its three-letter ticker symbol, was one of the world's most cutting-edge companies when enterprises began widely using computer systems in the 1980s and 1990s. It's gone through a transition in recent years, focusing more on cloud services and specialized hardware and software today.
The company's dividend has been a constant -- management has raised it for 27 consecutive years. Investors get a 5.2% yield at the current share price. From a cash standpoint, the dividend payout ratio has climbed over the past couple of years. However, it's already begun declining, and analysts believe profits will grow at a low to mid-single-digit pace for the next several years, so the dividend doesn't seem in immediate danger of being cut.
IBM Dividend Yield data by YCharts
The stock's valuation makes it worth considering as a buy today. Shares had a strong 2022 but have declined more than 10% since January. IBM currently trades at a price-to-earnings ratio (P/E) of 13 against 2023 estimates, a reasonable price tag for a company that will probably grow more slowly than the broader market moving forward.
2. Dial up this 6.9% yield at bargain prices
Telecommunications stocks are often great dividend investments, and Verizon Communications (VZ 3.25%) is among the best. It's the largest telecom company in the United States and the second-leading wireless network by market share. Society relies on phones and the internet to communicate, making them as crucial to most households as electricity or groceries.
Such a steady business has made Verizon a reliable dividend stock. The company has raised its payout for 18 years and counting, and investors get a whopping 6.9% yield at the current share price. Verizon's business can require significant investments to build its networks (such as 5G). Therefore, look at Verizon's bottom line to see how it affords the dividend. You can hold shares and sleep well -- Verizon is sending only half its profits to shareholders.
VZ Dividend Yield data by YCharts
The market's turbulence has affected Verizon's valuation. Shares trade at a P/E of just eight, a discount to its average over the past five years (P/E of 11). Ironically, Verizon's dividend yield is its highest in recent memory despite its sound payout ratio. Investors can take advantage of this juicy yield that should still grow over time; analysts believe the company's earnings will grow by an average of 4% annually over the next few years.
3. This telecom company is slimming down and fattening your wallet
There aren't many players in U.S. telecom. AT&T (T 0.95%) is Verizon's main adversary. It's the leading wireless carrier by market share and comes in just below Verizon in annual revenue. But AT&T has taken a far different approach to growth over the past decade. The company spent billions unsuccessfully branching out into media, a venture it ended by spinning off its remaining media assets in a deal to form Warner Bros. Discovery.
Management has worked steadily on reducing the company's debt in recent years, even cutting the dividend to shareholders. A cut probably won't instill confidence, but AT&T's financials are better for it. AT&T's dividend is now covered by cash flow, and the payout ratio should fall to around 50% in 2023.
T Dividend Yield data by YCharts
AT&T's mistakes have cost shareholders; the market has pushed the stock's valuation steadily lower. Shares trade at a P/E of nearly 8 today, well below the stock's long-term norms (P/E averaged 18 over the past decade). However, it's hard to think the stock has more downside risk than upside potential, given AT&T's improving financials and recent strong performance in its core business. Don't be shy about locking in that 6% yield if income is your primary focus.
