Companies that generate more cash than they know what to do with often give it back to shareholders through dividends. Think of it as a reward just for being a committed investor in a given company. A dividend yield is the percentage of the stock’s current share price that the dividend amounts to over the course of a year.
A high dividend yield can sometimes be a warning sign to investors because it could signal that investors want a large yield to compensate them for holding a risky stock (a lower stock price creates a higher dividend yield). These three stocks have 6% dividend yields and strong financials to back them up.
1. A smoking-hot dividend
Altria Group (NYSE:MO) is the largest tobacco company in the United States. It owns the famous Marlboro brand of cigarettes. The company pays investors $3.60 per year, which works out to a 7.07% dividend yield.
It most recently raised its dividend by 4.7%, marking the 56th increase to its payout in the past 52 years. Smoking is a declining habit in the United States, where Altria conducts virtually all of its business. However, tobacco products have strong pricing power due to their addictive nicotine content. Price increases have been able to offset volume declines and steadily boost earnings growth over the years.
Altria shipped 126.6 billion cigarettes/cigars in 2014 and just 103.2 billion in 2020. Despite this large drop in volume, the company’s earnings per share rose from $2.56 to $4.36 over the same time frame — and its annual dividend payout from $2.00 per share to $3.60. Management maintains an 80% dividend payout ratio. So as long as Altria can steadily increase its bottom line, investors can count on generous dividend payments to continue.
2. Paging huge dividends
Omega Healthcare Investors (NYSE:OHI) is a real estate investment trust (REIT) that invests in healthcare properties, particularly long-term care and assisted-living facilities. Real estate investment trusts are companies structured in a way that requires them to pass along the majority of their profits to their shareholders, receiving favorable tax treatment from the government in exchange.
This REIT pays a quarterly dividend of $2.68 per share, creating a dividend yield of 8.09% on its current stock price. REITs calculate their dividend payout ratio using the cash flow from their business, referred to as “funds from operations.” Omega’s dividend payout ratio is 82% based on the company’s 2020 adjusted funds from operations of $760 million.
The population in the United States is growing and aging simultaneously. Omega’s management estimates that by 2040, the 65+ year old population in the U.S. will grow to 80.8 million people, up from the 56.1 million it was in 2020. This should drive long-term demand for assisted living facilities, giving Omega Healthcare an opportunity to steadily grow and support its dividend payout over the coming years.
3. The dividends flow like oil and gas
Enbridge (NYSE:ENB) is one of the largest energy companies in North America. It owns and operates a network of gas and oil pipelines. Many oil and gas companies are susceptible to the underlying commodity prices of oil and gas. A company that drills for and sells oil will make more money when oil prices are high and less when prices are low. The tendency for commodity prices to go up and down over time makes them potentially volatile investments.
However, Enbridge is a pipeline company. Pipelines transporting oil and gas from fields to refineries are essentially the “toll booths” of the industry. They make money from the amount of oil and gas that flows through their pipes, regardless of what the commodity prices are at that time. Enbridge is much less volatile due to this and has proven to be a reliable dividend payer, raising its payout for the past 26 years.
The company pays a total annual dividend of 3.34 Canadian dollars per share (about $2.64). That gives it a dividend yield of 6.63%. As long as the world continues to use oil and gas, Enbridge should continue putting cash in shareholder pockets.
Here’s the bottom line
What do all three of these companies have in common? All three have steady business models that continue to bring in profits year after year. Tobacco, oil and gas, and telecom won’t get growth investors excited, but a stranglehold on a mature industry can result in years of cash flow and dividends for income-focused investors, which is exactly what Altria, Omega, and Enbridge provide.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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