It’s been a volatile year for investors in general. And nowhere has that been more true than in high yield dividend stocks.
In March and April, there was a massive number of companies that slashed or entirely suspended their dividends. This year has been a period of devastation for income-focused investors, particularly in sectors like real estate investment trusts (REITs). And while things have gotten better since this spring, we’re still seeing more dividend cuts and profit warnings even now.
That makes stock selection of the utmost importance. So, which current high-yield dividend stocks will be able to make it through the current downturn and come out stronger on the other side?
When looking for dividends of 5% a year or greater, you’re going to have to sort through a lot of value traps and low-quality companies. Fortunately, though, these seven companies have what it to takes to prosper as the economy comes back to life. Here are seven high yield companies to invest in now:
- Kraft Heinz (NASDAQ:KHC)
- Enbridge (NYSE:ENB)
- Altria (NYSE:MO)
- Boston Properties (NYSE:BXP)
- Omnicom (NYSE:OMC)
- Valero Energy (NYSE:VLO)
- People’s United Financial (NASDAQ:PBCT)
Dividend Stocks to Buy: KraftHeinz (KHC)
Dividend Yield: 5%
This food giant has fallen on hard times in recent years. Kraft loaded up on debt a few years ago in order to complete its monumental merger with Heinz back in 2015. It turned out that results fell short of expectations, though — the company never managed to generate sufficient cash flows to justify the deal.
As a result, KHC stock had to cut its dividend previously and the stock price plunged from around $90 to as low as $25 in 2019. However, a new era is forming for Kraft Heinz.
Right before the pandemic, the company had already stabilized its business and returned to positive organic growth. Then the novel coronavirus hit, which caused a big rush of people to stock up on packaged foods. Even now, the sales boost continues as people continue to prefer cooking at home over going out to eat.
With profits now moving higher, it appears Kraft Heinz has turned the corner. And at this price, KHC stock is going for just 12.9 times earnings while paying a greater than 5% dividend.
A lot of people are still mad at Kraft Heinz for its disastrous decline over the past few years. But people who take a more forward-looking outlook have the opportunity to cash in. Kraft Heinz is in the early innings of a dramatic multi-year comeback story, making this pick of the dividend stocks certainly worthwhile.
Enbridge (ENB)
Dividend Yield: 8.6%
Some investors absolutely hate energy stocks right now. And that’s a reasonable reaction, given the dreadful performance of crude oil and related oil and gas producers in recent years. However, those traders risk throwing out the baby with the bathwater.
That’s because the pipeline companies are in a much better position than the oil and gas producers themselves right now. While low energy prices can quickly crush an exploration and production company, pipeline operators generally have a great deal of leeway. At the end of the day, the pipeline owner still has a monopoly — and if customers like power utilities and gas stations want to function, they still have to pay the “piper.”
We’ve seen this in recent years. Despite the extended downturn in prices, Enbridge has kept its business on a steady keel. In fact, it’s held its dividend in tact — something not all dividend stocks have been able to do.
What’s more, the business is continuing to grow. Management sees mid-single-digit annual distributable cash flow (DCF) going forward. That, in turn, should allow ENB stock to offer shareholders a small annual dividend increase on top of the already bountiful 8.6% dividend yield.
Altria (MO)
Dividend Yield: 9.2%
Altria stock has gotten hammered over the past few years, setting up a compelling high yield dividend stock opportunity here and now.
It’s not hard to see why MO stock has dropped. The company infamously paid a huge price tag for its stake in vaping company Juul. After that, Juul ran into stiff government regulation. Now it appears to be a massive loss for Altria in terms of its original investment.
More broadly, it’s no secret that Altria’s core tobacco business remains a declining industry. Altria has offset falling cigarette sales with price hikes, leading to stable profits and revenues. Ultimately, though, its long-term future is not secure.
The company’s efforts at diversification have been a mixed bag as well. In addition to Juul, Altria’s investments in the marijuana and alcohol sectors have seen uneven results.
While the bearish talking points are reasonable on their own, however, they miss the bigger picture. Altria is trading for just 8.2 times earnings — and earnings are going up. In fact, analysts see earnings growing at around 4% to 5% per year going forward. Needless to say, if a company can merely maintain flat earnings at that price-to-earnings ratio, you’re going to make good money.
Add growth on top of that and the returns should be excellent. By my estimation, an 8 times price-to-earnings ratio translates into a 12.5% annual earnings yield on your capital. With that yield, Altria can easily pay out its 9% dividend yield to shareholders and still have profits left over to pay off debt or buy back stock.
In the case of Altria, investors have gotten too caught up in the negative points about the company. They’ve missed just how cheap and compelling MO stock really is — a standout among the dividend stocks.
Boston Properties (BXP)
Dividend Yield: 5.2%
Boston Properties is one of the nation’s leading office owners. Admittedly, that sounds like a messy business given the current work-from-home trend. However, BXP stock more than reflects that risk. Shares are down a little under 50% from their 52-week highs, creating a great bargain.
And, unlike many office companies, Boston Properties is significantly insulated from the current unfavorable trends. That’s in large part because the firm has focused on trophy buildings in Tier 1 cities. For example, the company has developed real estate in San Francisco focused on life sciences. Specialized facilities like these are set-up for doing laboratory work that simply isn’t possible over a video call.
More broadly, Boston Properties generally owns high-end buildings. Therefore, while lower-quality office space can go vacant or have to lower rent to attract tenants, BXP’s holdings should remain in high demand. We saw that this relatively recently. Despite everything going on with the economy right now, Boston Properties managed to collect 98% of its June office rent, for instance. In the face of this pandemic, the company continues to collect.
Of course, BXP stock may remain bumpy in the short-term given all of the uncertainty around Covid-19 and the work-from-home trend. But for long-term income-seeking investors, this pick of the dividend stocks — at a 5.2% dividend — is quite the treat.
Omnicom (OMC)
Dividend Yield: 5.3%
Omnicom is one of the world’s leading advertising agencies, making it stand apart from other dividend stocks. However, its stock — along with the other industry players — has gotten walloped in recent years. There’s a logical reason for that.
For one, the novel coronavirus has hurt the advertising business in particular in 2020, with so much of the economy temporarily shut down. And on a longer-term basis, digitalization threatens the cozy way the industry operates.
But — while the internet has certainly changed advertising — some investors may be overstating the impact on ad agencies like Omnicom.
Omnicom doesn’t just buy ads for its clients. It’s also a full-service public relations and customer relations shop. The company has had decades-long relationships with many of the world’s leading brands — it handles marketing, crisis management, field research, and more for these leading firms on top of executing their marketing campaigns.
Sure, the internet has disrupted pure advertising in some large ways. But for a big food or car company, buying some internet search ads is hardly a replacement for having Omnicom by their side. OMC stock reflects this: even with the rise of online advertising, the company has managed stable profits and revenues in recent years.
Yet, thanks to the novel coronavirus, shares have fallen from about a 12 times price-to-earnings ratio to a forward ratio of 8.9. That offers notable value for interested investors — in addition to the 5.3% dividend yield.
Valero Energy (VLO)
Dividend Yield: 10%
Like many energy stocks — and dividend stocks in general — Valero has gotten pummeled this year. However, the prognosis for VLO stock is much better than most of its peers. That’s because Valero doesn’t have significant exposure to the actual price of oil or natural gas. After all, the company isn’t producing or transporting crude oil. It merely refines it.
Valero turns crude oil into end products like jet fuel, gasoline, heating oil and asphalt. Understandably, given the novel coronavirus, the demand for these products has dropped in 2020. Over time, however, the proverbial engine is starting up again. International air travel, for example, is showing a steady — if modest — increase after virtually stopping earlier this year. As travel comes back, demand will return and Valero will be able to charge normal premiums on its refined oil goods.
In the meantime, as the biggest independent refiner in the country, the company has a ton of scale. This gives it the strength to ride out the current downturn in a way that smaller refiners have struggled to do.
Additionally, the recent election results give Valero an unexpected benefit. If things hold up as they are projected now, it appears we will have a President Joe Biden along with a Republican-led Senate. This gridlock will likely prevent Democrats from passing a Green New Deal-type structure that would phase out Valero’s refined products. On the other hand, we’re almost certain to not see new refineries built under Biden, keeping VLO’s competition modest.
This “not too hot, not too cold” dynamic should work favorably for Valero — and its investors — in the coming years.
People’s United Financial (PBCT)
Dividend Yield: 6.5%
Rounding out my list of dividend stocks, People’s United Financial is one of largest independent bank franchises in the northeastern United States.
Now sure, I know there are a ton of high-dividend banks at the moment. I also know that people largely don’t want to invest in them, given the economic downturn and low interest rates. However, PBCT stock is worth making an exception.
Why? For one, People’s United sailed through the 2008 financial crisis with hardly any loan losses, as the bank’s management is highly conservative. It makes low-risk moderate-reward loans, and doesn’t lever up the balance sheet. The bank also grows at a modest clip — primarily by acquisitions — which allows it to spend the majority of its profits on the large dividend to shareholders. In fact, People’s United is one of the rare banks that has managed to increase its dividend every year, dating back to the early 1990s.
Maybe People’s United is not an exciting bank — the stock price is usually quiet from week to week and its earnings reports rarely surprise. However, every three months, it kicks out another fat dividend payment.
With shares in a correction at the moment, investors now have a nice opportunity to get into PBCT stock.
On the date of publication, Ian Bezek held long positions in KHC, PBCT, MO, and ENB stock.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.