In a Low-Interest-Rate Environment, High-Yielding Stocks are the Best Place for Income Investors to Turn. And these Five Stand Out.
With interest rates at shoelace levels these days, millions of investors are looking to the stock market for income, focusing on companies that pay higher-than-average dividends. But that strategy comes with a risk, the possibility that the stock’s price will fall by greater than the amount of the dividend, resulting in a net loss for the shareholder. How do you avoid that risk? Choose stocks that actually have real upside potential—ideally stocks that are moving up now! Here are five good stocks with high yields that I like today, all yielding more than 5.0%.
5 Good Stocks with High Yields
Good Stock with High Yield #1: AbbVie (ABBV); Yield 5.5%
AbbVie was born in 2013 when it was spun off from Abbott Laboratories (ABT). Since then, it’s gotten big, and the main reason is its blockbuster autoimmune drug Humira, which is by far the world’s best-selling drug with nearly $20 billion in annual revenues. But Humira is already facing generic competition (in the form of biosimilars) in Europe and will face competition in the U.S. (which accounts for three quarters of revenue) in 2023. The market has worried that AbbVie won’t be able to replace the lost revenue on such an important revenue source, and as a result, the stock fell about 50% from January 2018 until its low in mid-August.
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However, since then the stock has turned around, and the reasons are these: Recently launched blood cancer drugs Imbruvica and Venclexta have impressive growth and appear on the way to being multibillion-dollar blockbusters. Endometriosis drug Orilissa (launched late last year) will also be a blockbuster drug. And Rinvoq and Skyrozo both received FDA approval this year, and are ranked as two of EvaluatePharma’s top three new drug launches for 2019. By some estimates, those two drugs could combine for annual sales of more than $10 billion. In addition, AbbVie plans to acquire Ireland-based specialty pharmaceutical company Allergan (AGN) next June for $63 billion, which will boost earnings and further diversify AbbVie away from Humira.
Cabot Dividend Investor analyst Tom Hutchinson recently wrote, “The stock is up 38% since mid-August, and 18% since October 1. Yet despite the recent run-up, ABBV still sells at a remarkably cheap forward price/earnings ratio of about 9. This is still a great stock to buy here.”
Good Stock with High Yield #2: Altria (MO); Yield 6.7%
Everyone knows Altria, previously known as Philip Morris, and everyone knows how the vaping crisis has weighed on its big investment in JUUL (which it bought a 35% stake in a year ago), as regulators and politicians jockey to appear both tough and caring in an election year. And because of that, the stock has probably bottomed! In fact, Cabot Dividend Investor analyst Tom Hutchinson recently wrote, “The stock has already priced in a terrible scenario, and has likely already bottomed. Because of the dividend, value and limited downside Altria is still a solid investment in the current environment.”
Looking at the chart, I see that MO has fallen from 78 in mid-2017 to a recent low of 39, losing half its value (just like AbbVie), while earnings have actually increased—and analysts are looking for earnings to continue growing in 2020. That means great value, and a good dividend. But you’ve got to have the courage to buy when the news is bad!
Good Stock with High Yield #3: Designer Brands (DBI); Yield 6.1%
Designer Brands is one of North America’s largest designers, producers and retailers of footwear and accessories—though just one-tenth the size of Abbvie by revenues, so far less visible to institutional investors. The company operates DSW Warehouse, The Shoe Company and Shoe Warehouse stores with nearly 1,000 locations in 44 U.S. states and Canada. Revenues have grown every year for 27 years as management has opened more stores (the cookie-cutter strategy), and earnings have grown most years as well. Plus, analysts are expecting EPS growth of 14% this year and 16% next year. Yet the stock is undervalued, with a 2020 P/E ratio of just 7—in part because the stock has fallen 52% since late 2018. One big fear, of course, was the impact of tariffs, but as often happens, it appears that the fear was greater than the reality, and investors have been coming back into DBI in recent months. The stock is now up 14% from its August low, and Cabot Undervalued Stocks Advisor analyst Crista Huff recently wrote, “There’s very little corporate or Wall Street news on Designer Brands, in between the quarterly earnings reports, but company management is projecting 2021 EPS growth of about 24%.”
Good Stock with High Yield #4: Dow (DOW); Yield 5.3%
Dow, which first began trading in July, is the materials science division of the former DowDuPont (DWDP). With 113 manufacturing sites in 31 countries, it makes a wide variety of materials and coatings products for both consumer and commercial markets. Revenues are a giant $47 billion, but the company’s market capitalization is just $38 billion today—and I don’t see a good reason. Analysts expect EPS of $3.56 and $4.27 in 2019, for a growth rate of 28%—yet the stock’s forward P/E is just 12.4. Maybe it’s because the stock is so young that analysts don’t have a handle on it yet—in which case the opportunity is yours for the taking.
Cabot Undervalued Stocks Advisor analyst Crista Huff recently wrote, “Dow is exhibiting concrete progress on cash flow, cost cutting, debt repayment, a litigation win and an ability to thrive during a weak global economy. Longer-term investors can benefit from additional gains as the projections for aggressive earnings growth materialize and draw attention to the stock, while locking in the large dividend yield.”
Good Stock with High Yield #5: Schlumberger (SLB); Yield 5.5%
Schlumberger is the world’s largest oilfield service company, with roots in Houston dating back to 1926, and like most companies in the energy business, it’s had a hard time as energy oversupply has crimped margins. But CEO Olivier Le Peuch is moving the company’s focus away from North American shale drilling toward asset-light software and services businesses, and management expects to produce higher margins and free cash flow in 2020, with lower capital expenditures.
As I write, Wall Street expects EPS to fall 9% in 2019, and then to increase 17% in 2020, and the 2020 P/E is 20.0. The stock recently bottomed at 30, and while it’s the least strong of these five good stocks with high yields (though it’s back up to 35), it has plenty of upside potential, especially if the oil pendulum—as it often does—swings back the other way.
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More
*This post has been updated from an original version.