It has been tough going for income investors. Interest rates have moved up lately and the United States isn’t at zero interest rates anymore. However, even the new rates are hardly exciting. Five-year bank CDs still yield only in the high 1% range; 10-year U.S. treasury bonds pay in the low 2%; the S&P 500, as an index, yields just 2%. Even typical blue-chip high-yield stocks don’t pay that much at the moment; there isn’t much paying above 4% within high-quality equities.
So many investors trying to build an income portfolio stretch for yield in riskier high-yield stocks. Not content with the income available from high-quality bonds or blue-chip stocks, investors reach for more.
Be it junk bonds, real estate investment trusts, master limited partnerships or simply risky common stocks, investors are exposed to more downside in return for yield. That’s not bad in principle, but in practice, investors often pay a dear price for the extra income.
That said, within the high-yield space, there are better options than others. Few stocks yielding 6% or more have rock-solid dividends. However, the four I’ve identified here have above average odds. While high-yield stocks probably shouldn’t be the centerpiece of most people’s portfolios, these dividend stocks can add a nice touch of yield to a diversified portfolio.
High-Yield Stocks to Buy: BP plc (ADR) (BP)
BP plc (ADR) (NYSE:BP) hasn’t been a star performer lately. In fact, BP stock has badly underperformed its U.S. peers in recent years. Blame the Brexit, the ongoing reputation hit from the Deepwater Horizon disaster or whatnot, BP stock simply hasn’t performed.
Over the last five years, BP stock has returned less than 1% per year annualized. And yes, that paltry figure already accounts for dividends.
Over that same span, Exxon Mobil Corporation (NYSE:XOM) returned 2% per year, while Chevron Corporation (NYSE:CVX) put up more than 4% per year. The underperformance gap has persisted. Both Exxon and Chevron stock roared back to near all-time highs in late 2016, while BP didn’t come close.
However, BP’s out-of-favor status has allowed it to sport a superior yield. The company currently yields 6.9%, compared to just 3.7% for Exxon and 4% for Chevon. While BP is only marginally profitable at current prices, the competition isn’t much better. Chevron outright lost money over the last 12 months. Exxon’s 43 price-to-earnings ratio isn’t that great either.
BP can’t cover the dividend at today’s oil price, but break-even is around $60; not all that far off. Chevron’s dividend looks similarly precarious with current oil prices. However, since BP pays nearly 7%, it has room to trim the dividend and still yield more than Chevron or Exxon does in the event oil doesn’t rebound. It’s hard to call any oil dividend highly safe in today’s environment, but BP’s is the best risk/reward situation of the bunch from a high-yield stock perspective.
High-Yield Stocks to Buy: GameStop Corp. (GME)
I recently discussed GameStop Corp. (NYSE:GME) in detail. I suggest reading this to get a full take on the company’s benefits and risks. For today’s article, let’s focus on the dividend. With the rally over the past couple weeks, the stock now yields 6.6%, though it could easily scoot back to 7% if Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY) enthusiasm fades.
GME stock is yielding so much because investors have concluded the company is a dinosaur that will soon be the next Blockbuster or Radio Shack. That could well happen, but at today’s price, the market is taking too dim a view of the odds.
The console game industry simply hasn’t digitized as fast as other media forms. Analysts project physical games will make up an important amount of the market for the next five to ten years. Sales have come in strongly enough that GameStop has managed to grow earnings consistently for the last five years. Its aggressive share buyback has helped; you can retire a lot of stock when buying it back at under 10x earnings. The buyback also makes the high dividend more affordable by reducing the number of shares they pay it out on.
While the physical business is eventually going away, GME has other businesses such as cell phone stores, which are quickly growing. It’s unclear how large these growth divisions will become. However, with the whole company priced at under 7x earnings, games merely hav to survive for another seven to eight years, and you get the rest of the company for free. And enjoy a huge dividend along the way.
High-Yield Stocks to Buy: Banco Bilbao Vizcaya Argentaria SA (ADR) (BBVA)
Banco Bilbao Vizcaya Argentaria SA (ADR) (NYSE:BBVA) isn’t the world’s most popular bank. But that Spanish banking giant is an increasingly attractive option, particularly in light of the pro-EU results of the recent French election.
BBVA sports a massive $53 billion market cap. It also provides excellent geographic diversification. While headquartered in Spain, it actually relies more on Latin America. LatAm accounts for 40% of the business, continental Europe is about 30% and both the U.K. and the U.S. are around 15% of revenues.
While Banco Santander, S.A. (ADR) (NYSE:SAN) is better known, arguably BBVA has significantly better management. And now everything is breaking in the bank’s favor. Populist candidates have taken hits at the ballot box in both France and the Netherlands this year. Interest rates are rising. Mexico, a key BBVA market, has roared back to life after the Trump scare.
The stock may seem pricey; however, BBVA is only 50% above its financial crisis low, and it is trading two-thirds off its peak price from 2007. Earnings could roar higher if Europe comes out of its funk and interest rates continue to rise globally. And there’s the matter of the dividend to consider as well. BBVA yields 6.8% at present. You won’t find that at a U.S. too-big-too-fail bank.
High-Yield Stocks to Buy: Omega Healthcare Investors Inc (OHI)
Omega Healthcare Investors Inc (NYSE:OHI) had a strong first quarter. The stock, which spent much of 2016 in a funk, rallied sharply. However a 5% sell-off in OHI in recent days has the stock looking like a decent dip buy.
Omega Healthcare runs skilled nursing facilities. This sector has come under some pressure in recent years due to increasing government regulation. Also, healthcare reform has everyone nervous, since Congress may enact substantial changes to the current system that would impact Omega’s pricing and payment collection methods.
This stuff is priced into OHI stock already though. Despite raising its dividend consistently for 14 years, the stock has flatlined since 2015, at best just trading sideways. The recent concerns about rising interest rates are only the latest aggravation.
Investors’ doubts have created an opportunity: OHI stock yields 7.6%, and we should expect 5% to 6% annual hikes going forward as long as growth continues at the same rate it has previously. Given the alternatives within the REIT space and high-yield stocks as a whole, that seems like a decent deal, and could power some upside in the stock beyond the dividend income.
At the time of this writing, Ian Bezek owned BP and GME stock. You can reach him on Twitter at @irbezek.