The combination of strong buy ratings and 5% yields make certain dividend stocks particularly attractive. “Strong buy” ratings indicate that the analysts covering a given equity believe in that equity. They have done the research required to make an informed opinion. The fact that they are highly positive about said equity, is a strong sign for investors.
Likewise, dividends yielding 5% or more are also attractive. One way to understand a 5% dividend yield is to state that it adds an extra 5% return to your investment each year. That’s a massive advantage which too often goes overlooked. Dividends can be used as a source of income or as a reinvestment vehicle. Over time, those 5% plus returns can dramatically boost the value of a given investor’s portfolio.
Investors will want to look out for a few potential pitfalls when investing in such stocks. Dividend history is of paramount importance. Pay particular attention to past reductions and the ability to pay dividends uninterrupted moving forward. More generally, seek companies that appear to be on a positive trajectory fundamentally.
British American Tobacco (BTI)
British American Tobacco (NYSE:BTI) is a stock that should logically raise multiple red flags to any rational investor. The biggest red flag of which is the simple fact that cigarette smoking rates continue to decline.
So, British American Tobacco should be expected to worsen in the coming years, right? Well no, not exactly. From a basic Financial fundamental perspective British American Tobacco actually appears to be in a pretty good place. Revenues are not strong but are expected instead to be mediocre over the next several years.
Overall revenues are expected to slightly contract in 2024 and then grow between 3% and 4% in 2025 and 2026. The important thing to note for income investors is that earnings per share are expected to improve rapidly in each of those three years.
That’s part of the reason that BTI stock is well regarded by analysts. It’s also the reason investors should believe that the company will continue to have the ability to pay its dividend. By the way, that’s a dividend currently yielding 9.5%. It looks like now is a good time to jump in, grab strong dividend income, and hopefully ride share prices higher for returns otherwise.
Philip Morris International (PM)
Philip Morris International (NYSE:PM) stock is very similarly positioned with British American tobacco. Broad, industry-wide headwinds have forced tobacco companies to reduce their reliance on cigarette revenues and find other ways to make money from smoking.
The 10,000 foot view shows that Philip Morris International is doing particularly well from that perspective. I’d argue that Philip Morris International is the better pic of the two tobacco stocks discussed in this article. The reason I say that relates to top-line and bottom-line performance.
The company is experiencing rapid revenue growth in 2024 that is expected to continue for the next several years. Meanwhile, bottom line performance is equally impressive. It is entirely possible that Philip Morris International experiences double-digit earnings growth in each of the next three years.
While the current strong performance is certainly a positive, it also takes some of the potential upside out of PM stock’s target price. That’s why Philip Morris International’s dividend yields a bit over 5% at the moment while British American Tobacco’s dividend yields nearly 10%. It’s a great indication of the relative risk in investing in each respective stock.
Realty Income (O)
Realty Income (NYSE:O) stock represents a real estate investment trust (REIT) in the retail sector. The company owns well over 15,000 real estate properties under long-term lease agreements with commercial tenants.
Let’s begin with a broad view of Realty Income’s strengths and then drill down to a more recent analysis. Investors are essentially looking at strong revenue and earnings growth throughout the next three years for Realty Income.
That broad view suggests the company will continue to pay its monthly dividend uninterrupted with near certainty.
Dividends are not paid directly from earnings at REITs. Instead we have to look at funds from operations (FFO) in order to determine the health of a REIT dividend. Realty Income continues to more than fund its dividend distributions through FFO.
The company also recently increased its guidance in that regard, again making it that much more attractive. For the more, I think one of the more overlooked strengths of Realty Income is the fact that it provides a monthly dividend which itself provides for an accelerated reinvestment schedule.
Kimco Realty (KIM)
Kimco Realty (NYSE:KIM) operates grocery-anchored shopping centers and other mix to use assets. The stock is another REIT meaning it is subject to the unique constraints of that business model. Those unique constraints primarily manifest in the analysis of the dividend, so let’s start there.
Generally speaking, dividends are paid from earnings. For most stocks, if the dividend requires less than 55% of earnings it is considered to be healthy. REITs are different: By law they must pay at least 90% of earnings to shareholders. In practice, they often pay much more, many times well in excess of 100%. In the case of Kimco Realty that figure is 186%.
So, how do we ascertain the health of a REIT dividend? The answer is funds from operations. Funds from operations in excess of distributions indicate that a given rate can pay its dividends. Kimco Realty has given guidance that it expects funds from operations in 2024 to land between $1.56 and $1.60. The company is likely to pay $0.96 in dividends this year.
Buy KIM shares for the high dividend but also because they’re expected to appreciate in price by roughly 20%.
Autohome (ATHM)
Autohome (NYSE:ATHM) stock represents an online platform for buying automobiles in China. The company primarily operates in the communications sector but also directly sells some automobiles through its platform. The bulk of its business is advertising and subscription revenues that facilitate the buying and selling of used automobiles in the nation.
Autohome doesn’t have a lot of coverage. In fact, it only has a single analyst covering its equity. take that for what you will but with a $27 share price there’s a lot of upside given that the lone analyst rates it at $46.
I can see some reasoning to believe that may be the case. Autohome’s P/E ratio is currently 12.85. Meanwhile, the company’s median P/E ratio has been above 21 over the past decade. Current low levels are likely a reflection of broader fears surrounding the Chinese economy and their effects on perceptions around automobile purchases.
The benefit of buying in now, aside from the excitement of chasing that upside, is a dividend yielding 6.3%. That dividend payment was easily paid out from first quarter earnings.
Alliance Bernstein (AB)
AllianceBernstein (NYSE:AB) is likely to be a good stock over the next few years. The company is expected to experience double-digit top line and bottom line growth through 2026 which is why analysts believe it has such strong upside.
The good thing to note here is that at $33.30 currently, AllianceBernstein’s shares remain below the low target price of $36.50. Some analysts believe they could rise as high as $51.
AllianceBernstein’s current dividend yields 8.7% as share prices have pushed yields higher. The company will continue to have high payout ratios in the 90% range into the foreseeable future.
A clear picture should be emerging here: AllianceBernstein stock is on the riskier side but offers the short-term benefit of high dividends and the expectation of rising share prices moving forward. Therefore, it’s probably not appropriate for all portfolios but if yours is more risk-forward AllianceBernstein certainly makes sense.
Clearway Energy (CWEN)
Clearway Energy (NYSE:CWEN) looks like one of the stronger well rated stocks with 5% dividends to consider.
The company operates more than 6,000 megawatts of installed renewable energy projects. renewable energy is again coming to the fore, this time in relation to artificial intelligence.
One of the biggest opportunities in AI at the moment is within the data center space. It is the area into which the most capital is being directed at the moment. As an example, the vast majority of Nvidia’s revenues are attributable to data center spending.
In turn, those data centers require massive amounts of energy. Data center operators have also committed to reducing carbon emissions which means they are likely to be powered by renewable energy to a greater degree moving forward.
Anyway, that’s arguably the strongest catalyst for Clearway Energy at the moment.It offers a dividend yielding more than 6% and share prices are currently just below $26 with plenty of upside remaining.
On the date of publication, Alex Sirois 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.