It’s a difficult time to be an income investor. The S&P 500 index has bounced back from its 2020 lows and has returned to a record high, bringing the average dividend yield on the index below 2%. In addition, when interest rates are close to zero, fixed-rate returns are also suppressed. The bottom line is that investors need to dig deeper for high yield stocks.
Fortunately, there are still plenty of dividend stocks out there with yields of 5% or more. And even better, investors don’t have to sacrifice quality.
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Several high-yield stocks feature sustainable dividends that offer room for dividend growth in the future. The following five stocks have returns in excess of 5%, with lasting competitive advantage and long-term growth potential that ensures the security of their dividends. InvestorPlace – Stock market news, stock advice and trading tips
Philip Morris International (NYSE: PM)
Enbridge Inc. (NYSE: ENB)
Unum Group (NYSE: UNM)
AbbVie Inc. (NYSE: ABBV)
International Business Machines (NYSE: IBM)
High Yield Stocks: Philip Morris International (PM)
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Philip Morris International is one of the world’s largest tobacco companies with a market capitalization of $ 123 billion. PM sells its products outside of the United States. The product portfolio of the cigarette manufacturer includes the flagship of the Marlboro brand.
On July 21, Philip Morris reported second quarter operating results. For the quarter, the company had net sales of $ 6.65 billion, a decrease of 14% and a decrease of 9.5% excluding currency fluctuations. Shipping volume was down 14.5%, while cigarette shipping volume was down 17.6% year-on-year.
The company was hit by a strong dollar, which negatively impacted the conversion of international sales to dollars. It also looked at the global economic downturn as a result of the coronavirus pandemic. To step up its struggles, it must fight falling smoking rates in several countries.
In response, PM has invested heavily in its new line of products called IQOS. This is a revolutionary product that heats tobacco instead of burning it. According to the company, this causes fewer harmful effects than conventional cigarettes. IQOS achieved early success through its rapid introduction and high market share in several international markets such as Japan and Korea. Heated tobacco sales rose 24% in the most recent quarter and is PM’s largest future growth catalyst.
In the meantime, PM stock is yielding 6.1%. The company will likely pay out virtually all of its earnings per share as dividends this year. However, future earnings growth from new products and share buybacks is likely to result in modest dividend increases each year.
Enbridge is an integrated oil and gas company based in Canada. The company operates a wide variety of businesses, including liquids pipelines, gas distribution, energy services, gas transmission & midstream, and green power & transmission. The company has a market capitalization of $ 60 billion.
ENB stock is down 26% since the start of the year as the oil and gas producer struggled under the weight of low oil and gas prices and the coronavirus pandemic that plunged the global economy into recession. In the second quarter of 2020, Enbridge saw revenue decline approximately 40%. However, Enbridge’s Adjusted EBITDA increased 3% year over year as declines in revenue were more than offset by lower costs.
Despite the coronavirus crisis, Enbridge maintained its guidance for distributable cash flow per share of $ 4.50 to $ 4.80 ($ 3.41 to $ 3.63) for 2020. In the middle of the forecast, Enbridge expects the DCF per share to increase by approximately 2%. The company expects a dividend payout ratio of 70% based on the guidelines for DCF per share. This indicates that the current dividend payout is safe.
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Another important factor in securing Enbridge’s dividend is its quality record. With more than 40 different sources of cash flow and a BBB + credit rating, Enbridge has manageable debt. The company has $ 14 billion of available cash and the debt to EBITDA ratio remains in the target range of 4.5x to 5.0x.
Management has a target forecast of an average of 5-7% annual DCF growth through 2022. This growth will be achieved in part through rate increases, cost reductions and new projects going online. If the company hits that forecast, it will have little trouble maintaining its dividend and continuing to raise the dividend on a regular basis.
Enbridge has increased its dividend for 25 straight years. With a high dividend yield of over 8%, Enbridge is a particularly attractive stock for high-income investors.
Unum Group (UNM)
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The Unum Group is an insurance holding company that offers a broad portfolio of financial protection and services. The company operates through Unum USA, Unum UK, Unum Poland and Colonial Life businesses, providing benefits in the areas of disability, life, accident, serious illness, dentistry and eyesight to millions of customers. Unum achieved sales of around $ 12 billion in 2019.
Unum was negatively affected by the coronavirus pandemic until 2020, but only to a minor extent. In the second quarter, Unum had sales of $ 3.0 billion, an increase of 0.3% over the same quarter last year. The core segment Unum US recorded a 9% decrease in adjusted operating income. The segment’s premium income rose 1.2% while net investment income fell 3.9%. Adjusted, earnings per share were down 9.5% from $ 1.23 for the quarter year over year.
Unum has built a leading position in its industry with a long track record of providing reliable service and building close customer relationships. These traits have served the company well in recessions.
UNM shares performed surprisingly well during the 2008-2009 Great Recession. Unum achieved earnings per share of $ 2.19, $ 2.51, $ 2.57, and $ 2.71, respectively, from 2007 to 2010. In addition, the dividend was also increased during this period. We therefore assume that Unum’s earnings and dividends will hold up in the current downturn. Unum has a dividend yield of 6.1% with a secure payout.
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AbbVie is a pharmaceutical company that was spun off from Abbott Laboratories (NYSE: ABT) in 2013. AbbVie’s key product is Humira, which alone accounts for almost half of the company’s total sales. This is a challenge as Humira has already lost patent exclusivity in Europe and will lose that status in the US in 2023.
Fortunately, AbbVie prepared for this by investing in new therapies both organically and through acquisitions. Adjusted research and development costs were $ 5 billion in 2019 and the investment is already paying off.
AbbVie has received 14 major approvals since 2013, 10 of which fall into the core immunology and oncology categories. AbbVie has multiple growth opportunities to replace Humira. One example is Imbruvica, a treatment for the most common type of adult leukemia, which grew 21% in the most recent quarter.
Growth from new products resulted in a strong performance in the second quarter. Revenue of $ 10.4 billion was up 26% year over year, while adjusted earnings per share increased 4% year over year to $ 2.34 for the quarter.
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The $ 63 billion acquisition of Allergan will also fuel AbbVie’s future growth. Allergan is a leader in aesthetic products like botox. The combined company will have annual sales of nearly $ 50 billion.
ABBV stock is considered a dividend aristocrat as its former parent company Abbott was on the list at the time of the split. AbbVie has continued to increase its own dividends every year since then. The stock now has a yield of 5.5% and with a forecast payout ratio of nearly 50% of adjusted EPS for 2020, the dividend is certain and there is room for further increases.
International Business Machines (IBM)
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Tech stocks rarely come with high yields, but IBM is a unique stock in tech. IBM is a global information technology company that provides integrated business solutions for software, hardware and services. In the service business, IBM is the world’s largest IT provider with a market share of 5.5%. The company has five divisions: Cloud and Cognitive Software, Global Business Services, Global Technology Services, Systems and Global Financing. IBM achieved sales of around 77 billion US dollars last year.
Earlier this month, the company announced that it would spin off its Global Technology Services division into its own public company. The aim is to shift the focus at IBM to cloud services.
IBM reported better-than-expected results for the second quarter of 2020. For the quarter, company-wide revenue decreased 5.4%, while diluted adjusted earnings per share decreased 31%. However, sales were significantly affected by divestments and currency fluctuations, which are typically one-off items. Adjusted sales declined by a milder 1.9% in the quarter, excluding divestments and currencies.
IBM continues to see declines in certain legacy segments like consulting and application management, but beneath the surface, the company is making great strides in key growth areas like the cloud. Total cloud revenue increased 34% on a adjusted basis for the quarter. Cloud revenue has increased 23% over the past four quarters. Finally, Red Hat posted revenue growth of 18% for the quarter.
These growth segments offer IBM the opportunity to pay a generous dividend to shareholders. The IBM share currently offers a return of 5.2%. The company has increased its dividend for 25 straight years, which means it will be added to the list of Dividend Aristocrats in 2021.
At the time of publication, Bob Ciura was long in ABBV.
Bob Ciura has been with Sure Dividend since 2016. He oversees all content for Sure Dividend and its affiliate sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider, and others. Bob received a bachelor’s degree in finance from DePaul University and an MBA with a major in investments from the University of Notre Dame.
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