Are you looking for a good dividend stock to own in a turbulent, unpredictable market?
If so, you’ll want to look at headline dividend yield, sure … but you’ll also want to look past that.
The problem with some high-dividend stocks is that they’re stretching their cash too far to make the payout — and thus any turbulence in their business could put that “regular” distribution at risk. In other cases, a high dividend yield is the end result of a massive decline in share prices. (After all, if you’re dividing the same dividend payout by a much smaller share price, you’re going to have a bigger yield.)
So if you’re looking for quality high-dividend stocks, you’ll also want to pore into whether the company can afford its dividend, how much room is present for future dividend hikes, and whether debt and corporate activities could ever jeopardize a dividend yield.
Today, we’re looking at five such high-dividend stocks that don’t just have attractive headline yields, but the makings of an overall strong investment.
In no particular order …
High-Dividend Stocks: Waddell & Reed Financial, Inc. (WDR)
WDR Dividend Yield: 5%
Waddell & Reed (WDR) is a mutual fund and asset management company — nothing flashy. There’s not a lot if any upside to revenue growth in the company, but WDR is highly profitable, doles out a generous dividend and is a pretty cheap stock.
WDR’s free cash flow totals $340 million over the past four quarters. Meanwhile, its quarterly dividend of 43 cents would cost the company $144 million over the next four quarters. So WDR’s free cash flow is more than enough to pay its regular payout, and then some.
Another metric of dividend stability, the payout ratio, stands at just 45% — meaning Waddell & Reed pays out less than half of its earnings in the form of dividends.
So even though WDR has already more than doubled its quarterly payout over the past five years, the company has even more room to grow its generous payout.
And at 11.5 times next year’s earnings, WDR is a cheap dividend stock to own as well.
High-Dividend Stocks: AT&T Inc. (T)
T Dividend Yield: 5.5%
Not only does AT&T yield a healthy 5.5%, but management has already said tha margins will continue to rise following the acquisition of DirecTV, as $2.5 billion in cost reductions are made.
It is likely that AT&T will create upward of $16 billion in free cash flow over the next four quarters. Meanwhile, it will pay out just $11.5 billion on dividends, leaving $4.5 billion that can be used to either pay off debt or go back into shareholder pockets.
Furthermore, investors must keep in mind that AT&T does not expect to achieve complete cost reductions from the DirecTV acquisition for another two years. With revenue expected to grow 15.1% this year and another 12.6% next year, there’s a good chance that free cash flow will rise well beyond $16 billion.
All great news if you’re long T.
High-Dividend Stocks: BP plc (ADR) (BP)
BP Dividend Yield: 6.7%
BP (BP) typically would not fall in my list of high-dividend stocks to own.
For one, margins have crashed due to the falling price of crude. Furthermore, its $4.5 billion in free cash flow over the last four quarters represents a significant decline from the $10.2 billion it earned last year. And lastly, BP recently finalized the terms for its Deepwater Horizon oil spill at a $20.8 billion price tag.
With all these issues looming, you might think that BP’s 6.8% dividend yield is a trap. After all, the near $7 billion that it costs BP to pay this dividend for one year is way more than its free cash flow.
However, I have three reasons why investors can look past the settlement, low crude prices and the drop in FCF:
- BP expects to pay out that $20.8 billion settlement over the course of 18 years, thereby making it very manageable at just $1.1 billion per year.
- Crude is historically volatile. Thus, investors can’t assume that the low price today is a reflection of what it will be three years from now — or even next year.
- BP has $32 billion in cash on its balance sheet, thereby making its dividend affordable for at least four years.
If for some reason that crude prices stay low, BP is large enough (with expected revenue of $225 billion this year) that it can find ways to cut costs and reduce its $20 billion in capital expenditures if needed.
BP is hardly in the winner’s circle right now, but it’s a lot better than it looks, making it one of the most intriguing high-dividend stocks on this list.
High-Dividend Stocks: Mattel, Inc. (MAT)
MAT Dividend Yield: 6.2%
Mattel (MAT) is one of the biggest toymakers in the world, a business that’s going nowhere so long as kids roam the earth.
While there is not a ton of upside for revenue growth in MAT, the company is highly profitable and pays a very attractive dividend yield.
Over the next year, MAT’s dividend will cost it about $515 million, while its free cash flow over the past year is $722 million. That leaves some cushion for MAT to maintain its high dividend while making payments on its $2.2 billion on debt.
High-Dividend Stocks: Seagate Technology PLC (STX)
STX Dividend Yield: 5.5%
Seagate Technology (STX) stock has fallen 41% this year as demand for PCs and laptops continues to dwindle. STX is a market leader in producing hard disk drives, which are forms of storage used in PCs. However, HDDs are also used in non-PC applications — where the majority of STX’s revenue is derived — like DVRs and data centers that backup cloud storage.
With that said, storage applications are a necessary component of all hardware, which means there will always be a place for STX. More importantly, STX operates in a high-margin business where it has achieved FCF of $1.9 billion over the past year. Meanwhile, it costs STX just $640 million to pay its current dividend for four quarters.
FCF may fall some as gross margins decline thanks to a lower-margin product mix, but Seagate still should still have no problem paying its dividend with plenty of cash to spare.
As of this writing, Brian Nichols was long T.