Income investors are always on the lookout for high-yield stocks, loosely defined as those with 5%+ dividend yields. The S&P 500 Index, on average, yields slightly less than 2% right now. This is a fairly weak yield, especially for income investors such as retirees who use dividend income to pay for retirement expenses.
The good news is, there are plenty of high-yield stocks that offer a much better payout than the broader market.
And, investors do not need to sacrifice dividend sustainability in the search for high yield. The following three dividend stocks combine attractive high yields above 5%, with sustainable payouts thanks to their strong business models and competitive advantages.
High-Yield Stock #1: AbbVie (ABBV)
AbbVie is a major global pharmaceutical company with a stock market capitalization of $120 billion. AbbVie was spun off from its former parent company Abbott Laboratories (ABT) in 2013. The reason for the spin-off was that Abbott wanted AbbVie to have its own dedicated management team and ability to focus entirely on its own strategic initiatives. The result has certainly paid off for investors, as AbbVie has generated compound annual revenue growth of 11.7% and adjusted EPS growth above 20% per year since the spin-off.
AbbVie’s business model focuses on Immunology, Oncology, and Virology. The company generates annual revenue in excess of $32 billion. Its most important product by far is Humira, which alone represents ~60% of the company’s annual revenue. The huge success of Humira fueled AbbVie’s tremendous growth over the past several years, but now poses a challenge to the company due to the onset of biosimilar competitors.
Humira already lost patent exclusivity in Europe, which weighed on AbbVie last year. The company has discounted prices in Europe to respond to competitors, which caused Humira sales to decline 15% in the international markets last quarter. AbbVie will face biosimilar competition to Humira in the U.S. starting in 2023.
Fortunately, the company has spent heavily on research and development to restore its pharmaceutical pipeline. AbbVie spent $10.4 billion on R&D in 2018, more than double the level from the previous year. This investment is starting to show positive results, as AbbVie has a robust pipeline of new products to help offset weakness in Humira sales. AbbVie expects non-Humira product sales to exceed $16 billion by 2020, and $35 billion by 2025.
Fourth-quarter revenue of $8.3 billion for the fourth quarter increased 7%, due primarily to 42% growth for Imbruvica. For 2018, AbbVie generated earnings-per-share of $7.91, up 41% from 2017. AbbVie management expects adjusted earnings-per-share in a range of $8.65 to $8.75 for 2019.
AbbVie’s strong profitability allows the company to pay a high dividend yield to shareholders, currently at 5.2%. The dividend appears highly secure, as AbbVie has an expected dividend payout ratio below 50% for 2019.
High-Yield Stock #2: AT&T (T)
AT&T is a very attractive dividend stock for income investors, not just for its high yield, but also for its long history of dividend growth. AT&T stock has a current dividend yield of 6.4%, which is more than triple the average dividend yield of the S&P 500. In addition, AT&T has increased its dividend each year for over 30 years in a row. It is on the list of dividend aristocrats, an exclusive group of 57 companies in the S&P 500 Index, with at least 25 consecutive years of dividend increases.
AT&T is a large telecommunications company with over 100 million customers in the U.S. and a significant presence in Latin America. The company provides a wide range of telecom services, including wireless, broadband, and cable and satellite television AT&T generates more than $170 billion in annual revenue.
AT&T has diversified its business model in recent years. Its most transformative move in recent years was the huge $85 billion acquisition of Time Warner Inc., a content giant that owns multiple media brands, including TNT, TBS, CNN, and HBO. Time Warner also owns a movie studio as well as sports rights across the NFL, NBA, MLB, and NCAA. AT&T has made additional bolt-on acquisitions to boost its growing content businesses as well and is working to maximize the advertising capacity of its content.
The Time Warner acquisition has already had a meaningful impact on the company. In the most recent quarter, AT&T generated $48.0 billion in revenue, up 15.2% from the year ago period. Revenue growth was primarily driven by the Time Warner acquisition that closed in June 2018. Adjusted earnings-per-share totaled $0.86 against $0.78 in the same period a year ago, for growth of 10%. For the year, AT&T reported revenue of $170.8 billion, up 6.4% as compared to 2017. Adjusted earnings-per-share increased 15% last year.
AT&T expects to generate earnings-per-share of $3.60 in fiscal 2019. With an expected dividend payout ratio of 57% for 2019, AT&T should continue to raise its dividend modestly each year. AT&T has a secure dividend payout and an attractive 6.4% yield.
High-Yield Stock #3: Altria Group (MO)
Altria Group is a giant in the tobacco industry. Altria Group is the parent company of Philip Morris USA, U.S. Smokeless Tobacco Company, John Middleton, Nat Sherman, and Ste. Michelle Wine Estates. The company’s flagship brands are Marlboro, the top-selling cigarette brand in the U.S., as well as smokeless tobacco brands Copenhagen and Skoal. Altria also owns a 10% equity interest in global beer giant Anheuser-Busch InBev (BUD).
This is a period of transition for Altria. The company is facing a difficult outlook due to the persistent decline in smoking in the United States. In the most recent quarter, net revenue increased 0.4% in the core smokable products segment as price increases more than offset the impact of falling shipment volumes. But price increases can only go on for some time, before consumers consider switching to a competing brand. Altria needs to reverse the long-running decline in shipment volumes, which fell 5.5% last quarter.
In response to this trend, Altria made some major investments in new product categories. The company already broadened its portfolio into wine and beer, and going forward will generate its future growth from e-vapor and marijuana. Altria recently announced a $1.8 billion investment in Canadian marijuana producer Cronos Group. Altria purchased a 45% equity stake in the company, as well as a warrant to acquire an additional 10% ownership interest in Cronos Group at a price of C$19.00 per share, exercisable over four years from the closing date.
Separately, Altria announced it will invest $12.8 billion in e-vapor manufacturer JUUL Labs for a 35% equity stake in the company, valuing JUUL at $38 billion. In light of these investments, Altria announced a cost-cutting program designed to reduce annual expenses by $500 million to $600 million. The goal of these two huge investments is to give Altria exposure to the two biggest growth areas of the smoke-able products industry—e-vapor and marijuana.
Altria maintains a target dividend payout ratio of 80%. The company has increased its dividend over 50 times in the past 49 years. With a 5.8% yield, Altria is an attractive high-yield stock.
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