It isn't easy finding sizable dividend yields when the S&P 500 Index is sitting near all-time highs and offering a somewhat paltry yield of around 2%. In fact, it usually requires stepping into investments that are out of favor for some reason. That said, if dividend investors tread carefully they can still find good yields from financially strong companies, even in sectors stuck in the Wall Street dog house. Here are three dividend stocks that deserve a closer look today.
1. A low-risk oil giant
Normally ExxonMobil (XOM -1.21%) gets my nod for high-yield oil companies, but right now Chevron (CVX 0.57%) and its 4% yield may actually have an edge for more conservative investors. That's because Chevron's production has been growing over the last few years, while Exxon's production is only just starting to hit an inflection point. Put simply, Chevron's past spending is paying off right now, while Exxon has been forced to ramp up its capital investment plans. To put a figure on that, Exxon is expecting to spend as much as $35 billion a year through 2025, while Chevron's capital budget is projected to be in the $20 billion space for the next few years. Chevron's production, meanwhile, is expected to rise, on average, between 3% and 4% a year through 2023.
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This is a big deal because oil prices are relatively weak today, making it much harder for energy companies to afford sizable capital spending plans. In fact, Chevron's capital spending as a percentage of cash flow from operations is among the lowest of its closest peers. (Exxon, for reference, has recently upped its planned asset sales to help finance the capital spending it has on tap.) There's also been a notable change with regard to balance sheets here as well. Chevron has historically had slightly more leverage than Exxon, but recently the company's financial debt to equity ratio dipped below Exxon's. This pair has always been more conservative than peers with regard to debt, but now Chevron looks like it has a stronger financial foundation. That's doubly true given the ramp-up in spending at Exxon, which will likely require additional debt over the near term if oil prices remain in their current range.
All in all, Chevron is a well financed oil giant with relatively modest spending plans and still growing production. Add in a 32-year history of annual dividend increases and a 4% yield, and conservative investors should be taking a close look here today.
2. The mall is not dead
Next up is real estate investment trust (REIT) Simon Property Group (SPG 0.34%), one of the largest mall owners in the world with a portfolio of roughly 200 enclosed malls and outlet centers. Most investors will probably stop right there and say, "No thanks." That's understandable given the hyperbole surrounding the so-called "retail apocalypse." But that would be a mistake.
For starters, it's highly unlikely that shoppers will abandon physical stores and only shop online. Humans are simply too social for that to ever happen. Yes, weak stores and weak malls are going to get shut down, but this is more of a transition to a new normal than an either-or situation. The final outcome is likely to be a mix of online shopping and well-located physical stores. And Simon has some great locations, with malls near large and wealthy population centers.
SPG Financial Debt to Equity (Quarterly) data by YCharts
Simon also has one of the strongest balance sheets in the mall REIT space. Its financial debt to equity ratio of roughly 0.6 times is lower than those of any of its peers. It covers its interest expenses by over four times, again better than any of its closest competitors. And it has roughly $7 billion dollars in liquidity (via cash on hand and a revolving credit facility) to help it pay for the changes that it needs to make to keep its malls desirable for both customers and retailers while the overhyped "retail Apocalypse" plays out.
If you can look past the gnashing of teeth in the retail sector, Simon and its 5.6% yield appear very well positioned to survive the tumult and come out the other side even stronger.
3. Advertising change
Another area being upended by the internet is advertising. Companies like Alphabet and Facebook are increasingly gaining clout, while older names like industry giant WPP (WPP -1.14%) struggle to maintain market share. But don't count the old-timers out. WPP's strength is in its creativity, which is a trait that the internet can't take away or easily replace. That said, WPP was slow to adjust to a new environment, and is working to get back in step with what its customers want.
To add a little complexity to the mix, the company recently ousted its founder, an industry icon. It was a somewhat ugly affair that played out in news headlines the world over. That's behind the company now, though, and it turned out to be a huge catalyst for change. With a new CEO, WPP has started to sell businesses that didn't fit well with its future. Using the sales proceeds, it has also made a massive commitment to debt reduction (leverage was a big red flag for dividend investors in recent years). And the company is rejiggering its businesses to foster greater cooperation between creative and technology-driven groups so they can better meet the needs of the current market. So far, the changes appear to be bearing fruit, with WPP winning new business and performance across the company starting to improve.
SPG Dividend Yield (TTM) data by YCharts
The biggest asset sale, a 60% stake in data analysis group Kantar, was completed on Dec. 5, so WPP's balance sheet numbers still look a little debt-heavy right now. But it intends to use roughly half of the proceeds to pay down debt, which should push the company's debt to EBITDA ratio down to around 1.5 times when it next releases financial reports. That will be in-line with or lower than those of some of its biggest peers (and at the low end of the company's targeted leverage range). The company is also set to put around 33% of the sales proceeds toward stock repurchases, which should offset the impact of lost revenue due to the sale.
In other words, WPP stock and its 6% dividend yield are backed by a business that's turning for the better, and on a much stronger financial footing than its historical financials suggest. That's worth a look from most dividend investors, though it should be noted that WPP is British and only pays dividends twice a year (of different sizes, which is fairly normal for Great Britain).
Good finds in ugly places
It's not easy finding good yields in today's market. But if you are willing to dig a little, you can, in fact, do it. Chevron, Simon, and WPP are all in out-of-favor industries. But they each offer a sizable yield backed by a well positioned and financially strong company. You may not like each of them, but it's highly likely that at least one will tickle your dividend fancy.
