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2 Stocks to Buy With Dividend Yields More Than 4%

By Adam Levy - May 11, 2016 at 5:22PM

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Finding a good yield at a fair price is tough in this market. Here are a couple of undervalued companies.

Finding a quality dividend stock these days trading at an attractive value and yielding more than 4% isn't easy. With interest rates remaining low, investors have piled into dividend payers looking for a good yield, causing stock prices to rise and yields to fall.

There are still a few stocks out there worth taking a look at, though. Here are two stocks to buy with dividends yielding more than 4%.

Crown Castle International
Crown Castle International (CCI 0.58%) is a real estate investment trust specializing in wireless infrastructure in the United States. It owns and leases land, builds cell towers on that land, and leases space on those towers to wireless carriers. Its long-term contracts (10-plus years) provide relatively stable and predictable growth in funds from operations.

Image Source: Crown Castle International.

The stock currently yields 4.07%, and management intends to pay out about 75% of adjusted funds from operations going forward. Since 2012 the company has had a spree of spending, acquiring tower properties from AT&T and T-Mobile, and small cell companies NextG and Sunesys. Crown Castle most recently acquired TDC and its 336 towers, but investors should expect most of Crown Castle's future investments will be in building out its small cell presence.

The company's dividend payout exceeded free cash flow in fiscal 2015, with dividends totaling $1.1 billion versus cash flow of $885 million. That trend may continue in 2016, as Crown Castle continues to invest in small cell infrastructure. But if you exclude the costs of investing in infrastructure for 2015, Crown would have generated $1.6 billion in free cash flow. Sustaining capital expenditures totaled just $105 million last year. 

As investment slows, Crown Castle will be able to easily cover its dividend with free cash flow, opening the opportunity for dividend growth. During the company's first quarter earnings call, CFO Jay Brown indicated that investment in small cells will slow in the near future. "I can find you a few new [markets]," he said, "but we are working in the top 25 cities already." It still has room to lay more fiber and increase its number of nodes in those markets, but it appears its not actively seeking to acquire new properties in new markets.

What's more, its small cells still have a lot of leverage in them as they offer dense network coverage. Currently, most of Crown's small cells only have one or two carriers on them. It could add a third and instantly boost its return on capital since the heavy lifting is already done. Additionally, Mr. Brown indicated that the general and administrative expenses associated with its small cell business have reached a stable run rate, so investors can expect margin expansion from the rapidly growing business.

Crown Castle shares are currently trading near an all-time high. But with stable revenue and earnings growth expectations, opportunities for expansion in small cells, and long-term potential for dividend growth, it's worth buying at this price.

Qualcomm
Qualcomm (QCOM -2.08%) produces processors for mobile devices such as smartphones, tablets, and smartwatches. It also licenses its intellectual property, collecting a royalty on just about every 3G and LTE device sold. That IP provides Qualcomm with more of a moat than other businesses in its industry. While its patent portfolio on 4G isn't as robust as LTE and 3G, most devices will need to be backwards compatible, providing enough leverage for Qualcomm to strike new deals with smartphone manufacturers.

Image Source: Qualcomm.

Qualcomm's chip business has suffered some blows recently. Samsung switched to producing chips in-house for its high-end devices, Huawei produces some of its own chips through its HiSilicon property, and Xiaomi is reportedly looking to develop its own chips as well. It received some relief earlier this month, however, when Intel decided to drop out of the mobile processor business.

Qualcomm certainly faces a lot of near-term pressure. Its chip business revenue is declining. It's suffering stagnation in licensing revenue due to issues collecting royalties in China, tepid market growth in smartphones, and a market decline in tablets. It did a poor job communicating with investors about its position with Samsung, which remains tenuous at best. As such, it's trading well off its 52-week high but now yields an attractive 4.2%.

Still, Qualcomm ought to remain at the top of the smartphone chip industry, as flagship models represent only a small percentage of phones sold worldwide, and most of the growth is coming from lower-end devices. What's more, its licensing revenue ought to bounce back more quickly after successfully defending itself against an investigation by the Chinese government into its royalty rates. The company is now making steady progress in signing licensing agreements with Chinese manufacturers, and working hard to improve compliance to collect royalties that have been withheld.

While revenue and earnings are expected to continue declining this year, the long-term outlook for Qualcomm is still strong. Revenue from both its chip and licensing business ought to return to growth in 2017, and investors can expect margin improvement as licensing continues to become a bigger part of the business. Analysts forecast average earnings-per-share growth of over 11% per year over the next five years, boosted in part by share buybacks and improved margin. Its forward P/E of around 12.5 is in line with competing chipmakers like Intel and MediaTek, despite a stronger growth outlook for earnings and higher dividend yield. 

Management intends to return 75% of free cash flow to shareholders through dividends and buybacks and has a whopping $30 billion -- $12 per share -- in cash and investments. That cash buffer gives Qualcomm good liquidity to buy back shares when management believes it's oversold, but it will mostly be used to invest in new products and IP.  

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Stocks Mentioned

QUALCOMM Incorporated Stock Quote
QUALCOMM Incorporated
QCOM
$127.85 (-2.08%) $-2.72
Crown Castle International Corp. Stock Quote
Crown Castle International Corp.
CCI
$179.41 (0.58%) $1.03

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