Investing solely for income, and finding the best dividend stocks, can be tricky. High dividend yields sound attractive on the surface, but almost always come with sharply higher risks. The largest risk is that the very same dividend will be cut.
Those cuts usually have a doubled impact. They reduce — or eliminate — the income stream investors were buying in the first place. And as shareholders in companies like General Electric (NYSE:GE), Frontier Communications (NASDAQ:FTR) and Mattel (NASDAQ:MAT) have learned, they often coincide with steep declines in the share price as well.
And so many investors gravitate to Dividend Champions or Dividend Aristocrats — companies that have paid and raised their dividend for many years. But that, too, creates risk. Looking solely backward at a dividend history ignores future risks.
Many widely held consumer-facing dividend stocks like Procter & Gamble (NYSE:PG) and General Mills (NYSE:GIS) are facing very real challenges. In 2005, General Motors (NYSE:GM) was a steady dividend payer with a 6% yield. It was bankrupt less than four years later.
Investing solely on yield can be dangerous. But there are high-yield stocks out there worth owning. Here are five of those stocks — all with solid yields, and bull cases that go well beyond their dividends.
Best Dividend Stocks: Ford (F)
Ford (NYSE:F) is not without risk — or even close. Like GM a decade ago, Ford has billions in debt and a pension that remains underfunded. “Peak auto” concerns are real, and the company does seem to be a bit behind rivals like Tesla (NASDAQ:TSLA) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) in electric and autonomous vehicles. This isn’t a ‘set it and forget it’ kind of stock, or one that can be bought solely for its 5.1% yield.
But I still see value in F stock, despite years of sideways trading. The move away from sedans should result in a more streamlined Ford — with higher margins and lower capital spending. A sub-8x forward P/E leaves the stock looking cheap. And I’m skeptical that the automotive industry is going to be revolutionized as quickly as some investors elsewhere seem to believe. F is only suitable for the higher-risk portion of a portfolio, but for investors willing to take on the risk, a 5%+ yield is only a portion of the potential reward.
Best Dividend Stocks: Covanta (CVA)
“Green tech” company Covanta Holding Corp (NYSE:CVA) has become a bit of a battleground stock. Short interest isn’t particularly high (just above 5%), but there are a number of skeptics toward the company. The sustainability of the business model of creating energy from waste and a leveraged balance sheet have raised questions as to whether CVA can maintain a dividend yield currently at 5.9%.
But management has insisted that the dividend is secure … and the company is making some progress in terms of earnings as well. A new facility in Dublin, Ireland has come online, with Covanta selling a stake in that operation to further improve the balance sheet. As a result, CVA trades near a multi-year high. The near-6% yield looks safe for now — and if CVA can bust through resistance, the stock should have some nice upside as well.
Best Dividend Stocks: Las Vegas Sands (LVS)
The dividend yield at Las Vegas Sands Corp. (NYSE:LVS) has come down quite a bit over the past couple of quarters — largely because LVS stock continues to rise. LVS is up over 50% since the beginning of 2017, and trades near its highest levels in over four years.
But there’s still a lot to like here. The company’s operations in Asia continue to grow nicely, in both Macau and Singapore. The Strip properties are performing well. And there are still opportunities for expansion, most notably in Japan.
Valuation is a bit of a question mark, and there is a slim risk that the U.S.-China trade war could lead to increased pressure on licensees in Macau. But LVS remains cheaper than peers like Wynn Resorts (NASDAQ:WYNN) — and it provides a nearly 4% dividend to boot.
Best Dividend Stocks: United Parcel Service (UPS)
United Parcel Service (NYSE:UPS) shares have struggled of late, trading pretty much sideways since the U.S. presidential election 19 months ago. A recent rally off March lows has faded, with the stock down 5% in the past two weeks.
Investors seem concerned about whether Amazon (NASDAQ:AMZN) will turn from key customer to competitor. But even with that risk, at 14x forward earnings, UPS seems too cheap. E-commerce growth is only going to continue, both in the U.S. and worldwide. There isn’t another company that can compete with UPS and rival FedEx (NYSE:FDX).
UPS does have significant near-term capital needs, as it improves its network. But this is a long-term play, and with a 3.2% yield and a dividend that has grown nicely the last few years, it’s an excellent play for income investors.
Best Dividend Stocks: Sabra Health Care (SBRA)
Sabra Health Care REIT Inc (NASDAQ:SBRA) has rallied since December, when I highlighted it as one of 10 stocks that wouldn’t cut its dividend in 2018. But even with SBRA up 14% so far this year, the stock still posts an attractive 8.4% yield — and has potential upside as well.
As the yield suggests, there are risks here. The company cut 2018 guidance after itsfirst-quarterr report, albeit by a penny, due to a delayed refinancing of its debt. Skilled nursing facilities, which account for the majority of Sabra’s tenants, are being squeezed on reimbursement, and one key client is headed for a restructuring.
But Sabra is making its way through. Proceeds from a recent sale of 20 units will help the balance sheet. And increasingly it looks like the dividend should be secure. With sentiment improving, SBRA should have more room to run — providing potential double-digit returns over the next year.
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As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.