Telecom giant AT&T (NYSE:T) has long been a favorite among dividend investors, with a current yield above 5.5% that leads its peers on the Dow Jones Industrials. But income investors know that some companies pay even more to their shareholders, and others have growth prospects that outweigh slightly lower yields.
To come up with alternatives to AT&T, three Motley Fool contributors weighed in with some promising picks for investors to consider. These three stocks all have risks of their own, but the rewards could be substantial as well. Let's take a look at these three picks.
Selena Maranjian (Two Harbors): Here's a better dividend for you: Two Harbors Investment Corp. (NYSE:TWO), which recently sported a yield not far from twice that of AT&T's at 10%! Two Harbors is a mortgage-focused real estate investment trust, often referred to as an mREIT. All REITs are special kinds of investments, as they're required to pay out at least 90% of their income as dividends.
Among mREITs, Two Harbors is of particular interest because of its investment portfolio. It features both "agency" and "non-agency" securities, with agency ones being backed by the U.S. government (through Fannie Mae or Freddie Mac, for example). That gives it diversification. Most of its holdings are agency ones, reducing its risk, while its non-agency holdings tend to offer higher yields. As the company itself has pointed out, it also features lower leverage than its industry average, and sports lower prepayment risk, as well.
The company has also diversified its operations by buying mortgage servicing rights, and management sees much potential there for further growth. This income stream acts as a hedge against rising interest rates, too.
The stock seems a reasonable value, too. Its recent P/E ratio near 23 is well above its five-year average of 16, but its forward-looking P/E is just 10, well below it. If interest rates rise, as they're likely to do in the coming years, that will put pressure on profitability for REITs, but given that Two Harbors' yield is already so high, even if it falls by half, it will remain compelling. Indeed, it has already undergone several payout cuts, with some investors pleased that its dividend obligations are now more reasonably managed. The stock is not without risk, but management seems to be doing a good job setting the company up for likely continued success.
Dan Caplinger (Medallion Financial): It's a long way from the telecom sector, but specialty finance company Medallion Financial (NASDAQ:MFIN) boasts a dividend yield that's almost double what AT&T offers. The company has an unusual business model, offering financing to would-be taxi-cab owners who need to buy expensive medallion licenses in order to do business within highly regulated key markets like New York City, Boston, and Chicago. Yet by getting cheap financing and then making loans to taxi owners at much higher interest rates, Medallion Financial produces impressive net interest income that it then turns around and pays out in the form of dividends.
Some have become nervous about the potential impact of ride-sharing services like Uber on the taxi industry generally, and on the value of medallions specifically, as a drop in the value of Medallion Financial's collateral could leave the lender vulnerable to losses. Yet at least so far, the company hasn't seen any real deterioration in credit quality, with absolutely none of its medallion-collateralized loans more than 90 days past due. Moreover, Medallion Financial has also worked to broaden its loan base to cover more types of commercial and consumer loans. As long as the economy thrives, Medallion Financial should be in a good position to keep paying shareholders well.
Joe Tenebruso (Oneok): AT&T offers investors a safe and sizable 5.6% yield. But there's another business currently offering an attractive 5% dividend, and one that's likely to grow much faster than that of the slow and steady telecom behemoth that is AT&T. That company is Oneok (NYSE:OKE).
Oneok is the general partner and owns approximately 40% of Oneok Partners (NYSE:OKS), one of the largest publicly traded master limited partnerships focused primarily on natural gas infrastructure. Oneok Partners is a leader in the gathering, processing, storage, and transportation of natural gas in the U.S. It also owns one of the nation's largest natural gas liquids (NGL) systems, connecting NGL supply in the central U.S. with key market centers.
The recent swoon in oil prices has not been kind to many energy companies -- or their shareholders. Oneok has not been immune to the downturn -- shares are down about 20% during the last 12 months -- but Oneok's business is more insulated to commodity price swings than many of its peers. That's because two-thirds of its revenue is derived from fee-based sources, and the majority of its business is placed under long-term contracts. So even after adjusting its distribution guidance to account for the substantially lower current commodity price environment, Oneok still expects to increase its dividend by 4% to 8% in 2015. And that's after a 44% dividend increase in 2014. AT&T, by contrast, will likely raise its payout by less than 3% in 2015, as it has over the last five years.
With $3 billion of additional growth projects in progress, and billions more likely in the future as the U.S. continues its movement away from coal and toward cleaner-burning natural gas, I expect Oneok to reward its shareholders with a gushing stream of dividend payments for many years to come.