Income investors are facing negative real returns as inflation rates soar. Not only is wage growth falling behind inflation, but cash savings are earning almost nothing in bank accounts. Investors who waited years for interest rates to rise and pay a better return now cannot wait. However, those who found high-yield stock gems have earned a phenomenal return over the last two years.
When the pandemic sent the market to panic lows, income stocks went on sale. The share prices of high-yield stocks dropped. But as the markets normalized, those stocks appreciated.
That said, investors seeking income still have to choose the right names; you should not chase stocks with poor free cash flow (FCF) payout ratios, for instance. If the business worsens, that could threaten the future dividend.
So, without further ado, here are seven high-yield stock gems to consider:
- Abbvie (NYSE:ABBV)
- British American Tobacco (NYSE:BTI)
- Altria (NYSE:MO)
- Medical Properties Trust (NYSE:MPW)
- Pfizer (NYSE:PFE)
- AT&T (NYSE:T)
- W.P. Carey (NYSE:WPC)
High-Yield Stock Gems: Abbvie (ABBV)
Investors were worried when health regulators applied a fresh warning on Abbvie’s arthritis drug. The U.S. Food and Drug Administration (FDA) issued a stern warning — or “black box” — on Rinvoq, saying that the drug “carries an increased risk of blood clots and death.”
Rinvoq is one of many blockbuster drugs for Abbvie, however. On Oct. 12, Health Canada approved the use of Rinvoq for severe atopic dermatitis.
This skin disease is a multi-billion-dollar revenue opportunity. Patients may take the once-a-day JAK inhibitor orally as an alternative to less effective, steroid-reliant treatments. Other firms offer biologics, which require injection. All in all, Abbvie has a good chance of growing its market share.
When the company acquired Allergan, it boosted its drug pipeline. It also added debt to the balance sheet. Fortunately, though, drug sales add plenty of free cash flow to pay for a growing dividend. Abbvie may also pay down its debt and cover the interest payments associated with the debt.
British American Tobacco (BTI)
The next entry on this list of high-yield stocks is BTI. On Sept. 30, British American Tobacco won a ruling from the U.S. International Trade Commission (USITC), which said that Philip Morris (NYSE:PM) and Altria must stop the sales and imports of Iqos.
BTI stock bounced sharply after this news. But even after that, the name still pays a generous dividend yield of 8.25%. It also has an annual payout of $2.96.
That said, BTI has still lost its case against Philip Morris in other regions. Plus, since Philip Morris will appeal the USITC decision, investors cannot rely on BTI benefiting from exclusive e-vape sales in the States.
Case in point, the recent rally looks as if it will continue to fade. There are a bevy of legal actions currently active between BTI and Philip Morris.
Still, all of this distraction creates uncertainty for investors and a discount on the stock. All told, it may be best to assume that the two firms will form a worldwide cross-licensing agreement. This assumption can help investors remove the unknowns. And if it does happen — which it likely will — BTI stock should rebound.
High-Yield Stock Gems: Altria (MO)
Altria, like BTI, is currently out of favor. MO stock slumped in April, June and again in September. Each time, the stock bounced right back.
The stock pays a dividend in the 8% range. In August, the firm also hiked its dividend to 90 cents per share.
To improve its balance sheet and shed its non-core businesses, Altria should sell its investment in Anheuser-Busch InBev (NYSE:BUD). Altria’s stake in InBev is worth $13 billion. The company could share the cash from the sale of that ownership through a special dividend, which would cause MO stock to spike temporarily. Alternatively, it could just pay down its debt.
This latter option would be the better use of the cash. The Federal Reserve is still threatening to raise interest rates. Although the Fed is hesitant to do so, it cannot hold off much longer. If Altria lowers its debt, its interest costs will fall. The firm could then pass its savings to investors by hiking up the dividend.
On Wall Street, analysts rate Altria as a “buy.” The average price target is almost $53.
Medical Properties Trust (MPW)
Right now, Medical Properties Trust is stuck in a tight trading range between $20 and $22.
On Sept. 22, the company sold 500 million euro 0.993% senior notes due in 2026. By swapping debt that costs 4% in interest, MPW stock will face lower costs, benefitting investors.
Readers may wonder who would buy debt that pays less than 1% in interest. Since the European Central Bank introduced low or negative yields, that interest rate is actually appealing.
On Jul. 29, Medical Properties posted second-quarter results with strong net income of 19 cents per share. The per-share normalized funds from operations were 43 cents.
Further, the firm completed $215 million worth of acquisitions in the quarter. It bought four general acute care hospitals and also acquired Kings Park Hospital, located in Scotland. Finally, it agreed to sell Capital Medical Center in Washington state for $135 million.
The steady results from this REIT suggest that yield-hungry investors will get a dividend hike soon. In the last quarter, its dividend was 28 cents, compared to 27 cents from a year ago. All in all, MPW is a good pick among high-yield stocks.
High-Yield Stock Gems: Pfizer (PFE)
Next up on this list of high-yield stock gems is PFE stock. The euphoria for Covid-19 vaccine stocks waned late this past summer. In particular, Pfizer peaked at over $50 in August and has held the line. It trades at almost $51 today.
Investors may be worrying that Pfizer and Biontech (NASDAQ:BNTX) will report lower revenue as vaccine sales slow, but the concern wasn’t enough to keep the stock down.
True, the continued rise in global vaccinations is lowering infection rates. But the FDA and the Centers for Disease Control and Prevention (CDC) still need to watch out for outbreaks among the unvaccinated. They also are still deliberating if younger age groups and other demographics should receive vaccinations.
That aside, Pfizer has also recently expanded its investment in gene therapy. On Oct. 6, it invested $30 million in Voyager Therapeutics, which will get $30 million upfront.
The company will also get payments of up to $600 million for product sales-based royalties. Voyager has a next-generation adeno-associated virus platform technology. It may also license its RNA-driven screening technology to Pfizer.
Finally, Pfizer recently announced solid data for its seasonal flu vaccine in older adults.
T stock is the next pick on this list of high-yield stocks. In recent days, shares have been flirting with above its recently-established 52-week low of $23.96 and trade today at around $24.13
Markets have continued to sell off the stock after shares peaked in May. In large part, income investors are having a hard time accepting the complicated spinoff it is pursuing with Discovery (NASDAQ:DISCA, NASDAQ:DISCK).
The telecom giant’s spinoff of WarnerMedia into a new company is a negative development. Essentially, the company is admitting its previous costly acquisition was a mistake. Now, it will get $43 billion in an all-stock transaction.
AT&T needs this money to pay down its debt. Interest rate hikes are on the way. Since it cannot risk low box office revenue, it must sell the content business. Conversely, the core telecom business has more flexibility in raising cash flow.
That said, the company may upsell its 5G mobile service offering. It may also raise monthly mobile rates to increase cash flow, increase dividends and pay down debt. Pre-spinoff, the stock already sports an annual payout of $2.08. So, it does not need to distribute its cash yet.
With T stock so beaten down, the company may also want to buy back shares.
High-Yield Stock Gems: W.P. Carey (WPC)
The offering will gross $351 million “to fund potential future investments […] to repay certain indebtedness, including amounts outstanding under its $1.8 billion unsecured revolving credit facility, and for general corporate purposes.”
Investors should expect WPC to use the funds to buy good quality NNN properties. This will expand the adjusted funds from operations (AFFO) and increase the dividend income for shareholders.
In Q2, WPC posted AFFO per diluted share of $1.27. Further, revenue rose by 10.1% year-over-year (YOY) to $319.7 million. In future quarters, investors can expect office property acquisitions to lift results. In a post-pandemic world, office lease demand will improve.
WPC should be able to profit off this by scooping up the best properties now at favorable prices.
Finally, on Oct. 5, the company offered $350 million worth of senior unsecured notes. It will use these funds to pay for costs associated with eligible green projects. As interest rates rise, this offering will lower the company’s cost-to-service debt.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.