The hunt for yield continues in a persistently low-interest-rate environment.
High-yield dividend stocks sometimes exists because of a deterioration in the fundamentals of a company that puts downward pressure on the stock price, but sometimes such instances of overly negative pressure offer up an opportunity where the underlying business can be purchased at a lower price.
More importantly for those seeking income, in addition to a lower price and thus higher margin of safety, these opportunities are accompanied by a hefty yield. And they can be found across industries.
Below are dividend stocks from retail, healthcare and oil & gas.
High-Yield Dividend Stocks: Macy’s (M)
Dividend Yield: 6.3%
Brick-and-mortar retailer Macy’s Inc (NYSE:M) may just be the most contrarian pick in my portfolio, but after being beaten down this year (Macy’s stock is down 33% YTD), it is now a compelling opportunity for value investors.
For some, M is in the “too hard” bucket, but the 6.3% yield and significant cashflow to support the dividend are among several mitigating factors for those playing the long game. The broad selloff and severely negative sentiment around all traditional retail has unfairly punished M stock. Expectations are so low that slight improvements in performance rather than a massive catalyst is all that’s needed to the tick the stock higher.
Starboard was in the early activist champion for M, but when Macy’s axed their plan to quickly monetize the real estate portfolio, Starboard exited its position. This left investors even warier of the future.
But the real estate value exists, and Macy’s management is determined to monetize, simply not in the Starboard fashion of spinning off assets into a JV transaction but not touching the retail operating company. Macy’s is pursuing a more one-by-one strategy to unlock the $21 billion of value (compare that to the $7 billion market cap).
High-Yield Dividend Stocks: GlaxoSmithKline (GSK)
Dividend Yield: 6.1%
Healthcare at large but GlaxoSmithKline plc (ADR) (NYSE:GSK) in particular was having a pretty good year through early June. GSK stock is up over 5% for the year, underperforming the broader pharma group.
It should at least trade in line with peers as it focuses on its portfolio of drugs with an emphasis on pharmaceuticals. These divisional changes alone should reap additional annual cost savings of £1 billion by 2020.
The 5-year operating margins for pharmaceuticals should come in around 30%. Other important divisions such as vaccines and consumer healthcare are projected at 30%-plus and 20%-plus, respectively. Better margins means improvements in cash generation, which will give GSK options.
CEO Emma Walmsley, has made clear her intention to rebuild dividend cover to the range of 1.25x to 1.5x FCF. All this bodes well for long-term investors in GSK.
High-Yield Dividend Stocks: BP plc (ADR) (NYSE:BP)
Dividend Yield: 6.6%
BP Plc (ADR) (NYSE:BP) provides a sizable yield and option value on an increase in oil prices. If the swings in commodity prices are too much to stomach, exposure via a well-run, strategic company like BP, is a good choice.
In the meantime, the company continues to get more and more efficient, driving down unit production costs. Since 2013, there has been a 40% reduction in dollar per barrel of oil equivalent (boe), driven mostly by reduction in headcount and supply chain improvements. This has led to a leaner, more resilient business.
This efficiency mentality also translates to new projects like Thunder Horse South Expansion project. It is up and running 11 months ahead of schedule and $150 million under budget.
Looking to the future, recent acquisitions give BP access to approximately 5 billion barrels at a cost of around $1 per barrel. These new acquisitions in addition to forthcoming projects will boost operating cash margins, which are already up 35% than the base portfolio in 2015.
Management is confident in that they can get production to 3 million barrels per day company over the next decade (excluding Russia).
As of this writing, Luce Emerson was long M stock.
