Despite the Federal Reserve signaling its intention to begin raising interest rates this year, it is still difficult for some investors in dividend stocks to find the yield that they need to meet their needs.
In some cases, income investors might be tempted to reach for high yields of questionable quality. This is dangerous way to invest, in our opinion, because high yields often mean high risk.
There are, however, stocks yielding more than three times the S&P 500 average that we believe are some of the highest quality names in the market place.
Investors looking for high-yield Dividend Aristocrats could consider the following stocks:
High-Yield Dividend Stocks: IBM (IBM)
First up on today’s list of high-yield dividend stocks is IBM, a leading global information technology company. The $111 billion company generates more than $57 billion in annual revenue.
Admittedly, IBM’s performance over the last decade has been inconsistent, at best. The company once went 22 consecutive quarters with negative revenue growth from 2013 through 2018. Earnings-per-share held up somewhat during the last decade, but this is due mostly to a sizeable reduction in the shar count.
IBM’s results were driven largely by clinging onto its legacy businesses. While other tech giants were enjoyable sizeable growth due to the high growth cloud space, IBM barely had on a focus on this area.
To its credit, IBM has tried to change the trajectory of its business. First, the company acquired Red Hat for $34 billion in July of 2019. IBM has been able to pair Red Hat’s open hybrid cloud technologies with the company’s extensive size and scale. With a presence in nearly 180 countries, IBM’s scale positions it to potentially become a much more impactful player in cloud.
The global cloud computing market reached $445 billion 2021. This business is expected to compound at almost 18% annually through 2028, showing that higher demand for services created by the Covid-19 pandemic isn’t expected to slow. IBM still trails leaders, such as Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN), but the company should be able to carve out a space for its own offerings.
Also working to IBM’s benefit is that it remains a leading provider of IT services, even after spinning off its weaker managed infrastructure business into Kyndryl Holdings (NYSE:KD). IBM also provides end-to-end solutions in a multitude of areas, giving it a wide variety of products to offer customers.
Despite less than stellar results over the long term, IBM has rewarded shareholder patience with 26 years of dividend growth. The company’s dividend looks reasonably safe as well, with an expected payout ratio of 66% for 2022. Dividend growth may slow due to the payout ratio, but the stock’s yield of 5.3% is nearly four times the average yield of 1.4% for the S&P 500.
Realty Income (O)
The second name we like among high-yield dividend stocks is Realty Income, a leading real estate investment trust that owns a wide variety of retail properties. The REIT has a market capitalization of nearly $38 billion and generates annual revenue of nearly $2 billion.
Realty Income is one of the most well-known REITs as it has an expansive portfolio of nearly 11,000 commercial properties. The trust has avoided owning troubled assets, such as malls, and instead focuses on purchasing, developing, and leasing standalone properties. This gives birth to a wide range of potential customers for the trust, including those in financial, industrial, entertainment, healthcare services, and government services industries. Portfolio occupancy is also extremely high at 98.5%, showing that the trust isn’t sitting on too many empty locations.
Realty Income has proven recession proof in prior years, where funds-from-operation actually grew during the 2007 to 2009 period of time. More recently, Realty Income withstood the worst of the global pandemic. Rent collection from the most impacted industries, such as movie theaters and gyms, did decline during 2020. The trust’s most recent quarter, announced on Feb. 22, showed that rent collection from these weakened businesses had recovered, with recent collection from movie theater clients reaching 100%.
In addition, Realty Income has taken steps to improve its core business. First, the trust merged with VEREIT, adding more 3,800 single-tenant properties to Realty Income’s portfolio. Realty Income then spun off its office properties, one of the weaker performers during the height of the pandemic, into a standalone entity Orion Office REIT (NYSE:ONL). The trust has also expanded from owning properties primarily in the U.S. to gaining a foothold in the U.K. and Spain.
As a result, Realty Income operates an extremely diversified business model. No tenant type contributes more than 10% of annual rents, limiting exposure to the downside if challenges occur.
Realty Income has earned the name “Monthly Dividend Company” because it has been paid a monthly dividend ever since becoming publicly traded. The trust also has 26 consecutive years of dividend growth and nearly 100 raises since going public in 1994. The expected payout ratio is close to 80% for 2022, but this isn’t especially high compared to other REITs. Realty Income yields 4.4%, more than three times the average yield of the market index.
High-Yield Dividend Stocks: Walgreens (WBA)
Our final name for consideration is Walgreens, a leading provider of pharmacy services. The company is valued at just under $40 billion and generates annual revenue of $135 billion.
Walgreens chief competitive advantage is that is one of the largest retail pharmacy providers in the U.S., Europe and Latin America. In total, Walgreens has more than 13,000 stores throughout the world as well as operates more than 400 distribution centers that provide needed medicines and products to more than 230,000 pharmacies, doctors, hospitals and health centers. This gives the company a size and scale that most competitors cannot replicate.
The pharmacy business will be a very important area as the age of the population in key markets continues to rise. People tend to need more access to medication and services as they grow older, giving Walgreens a built-in advantage against most of its peer group.
The company hasn’t been shy about trying to extend its reach either. The company added more than 1,900 Rite Aid (NYSE:RAD) stores in June of 2018, where it was able to acquire store locations, but not any debt.
While e-commerce has made for a difficult operating environment for many selling retail goods, Walgreens has managed to avoid much of this pain. Prescriptions and health consultations still mostly take place face-to-face, allowing the company to persevere despite the rise of online shopping.
Walgreens’ business model has also enabled the company to grow its dividend for the past 46 years. This places the company just a few years shy of reaching the required 50 years of dividend growth for entrance into the Dividend Kings. And with a projected payout ratio of just 36% for the year, Walgreens is in a strong position to do just that. Shares yield 4.2% at the moment, which is exactly three times the average yield of the S&P 500.
Final Thoughts
We believe that income investors should avoid reaching for high yield unless it comes from a high-quality source. To us, the Dividend Aristocrats are among the best names in the market given their ability to grow dividends over long periods. Investors can even find names yielding well above what the market offers within this index.
IBM, Realty Income, and Walgreens are three of our favorite high-yield dividend stocks that we believe can provide the income that investors desire without some of the risks that other high yield sources carry.
On the date of publication, Bob Ciura did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner 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 more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.