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Even though the Federal Reserve recently raised interest rates, yield is still very hard to find. Fixed income still doesn’t offer much in terms of income, as the yield on the 10-year U.S. Treasury bond currently sits at just 2.35%.
This means investors who desire higher levels of income may want to look into the stock market and dividend stocks. The average dividend yield of the S&P 500 Index is only 2%, but there are many highly profitable companies paying 5% dividend yields or more.
The following three stocks have high dividend yields more than double the average S&P 500 stock, with enough cash flow to support their generous dividend payouts.
Ford Motor Co. (NYSE: F)
Ford Motor has been hit by fears that the record auto sales in the U.S. are about to come to a screeching halt.
Indeed, the combination of rising interest rates and higher gas prices are likely to put a dent in Ford’s sales this year.
Last year, Ford’s revenue rose 2%, but pre-tax profit declined by 2%.
The company has warned that this year is likely to be worse.
Ford’s March vehicle sales declined 7%, and investors are responding by punishing the stock. Ford now trades at a trailing P/E ratio of just 10.
But even though sales fell, Ford’s average transaction price rose 3.4% for the month.
This is thanks largely to the F-Series, Ford’s flagship line of trucks. The F-Series accounts for the bulk of Ford’s profits, and sales of the F-Series actually rose 10% last month.
While Ford expects lower profit in 2017, it still projects more than $9 billion of pre-tax profit this year.
That will be more than enough to fund its growth investments, service its debt, and pay its dividend.
Speaking of the dividend, Ford stock yields 5.2%. And, the company has committed to paying a special dividend each year, if its fundamentals remain healthy enough to do so.
This year, Ford paid a special dividend of $0.05 per share.
Seagate Technology (NYSE: STX)
Seagate is a very rare stock, as it is a technology company with a 5.6% dividend yield. This is virtually unheard of in the tech sector.
Usually, tech companies prefer to steer excess cash flow towards share buybacks and acquisitions. While Seagate does engage in M&A and share repurchases, it also prioritizes its dividend, even within a difficult operating climate.
Seagate is being hit by the slowdown in the personal computer industry, which has resulted in a decline in demand for hard disk drives. Plus, Seagate is being pressured by rising demand for newer storage technology, such as solid state drives.
In response, Seagate is building up its cloud business, to capitalize on growth in software.
Its turnaround is gaining traction: Seagate’s adjusted EPS increased nearly 70% last quarter. This has allowed it to maintain its dividend when times are tough, a promising sign of a shareholder-friendly management team.
Even better, Seagate’s hefty payout is covered with cash flow. Even though Seagate’s revenue fell 20% in 2016, the company still produced $1.1 billion of free cash flow. Its free cash flow easily supported its dividend, which cost the company $727 million in 2016.
Seagate distributed roughly two-thirds of its free cash flow last year. As its cash flow improves thanks to its fundamental turnaround, its dividend payments could grow in 2018 and beyond, making it attractive among dividend stocks.
L Brands (NYSE: LB)
L Brands, parent of the Victoria’s Secret and Bath & Body Works brands, is a poster child for the devastation rippling through the retail industry right now.
L Brands is being hit by the decline of the shopping mall. As consumers do more of their shopping online, lower mall traffic is resulting in weaker sales at L Brands’ two flagship chains.
Add to this, L Brands’ decision to discontinue its shopping catalogue, and it is no surprise why investors are spooked. The company posted a 13% decline in comparable sales—a key metric that shows performance at stores open at least one year—for February.
But while the current landscape is frightening, it’s not all bad news.
Victoria’s Secret and Bath & Body Works remain popular, well-known brands, with leadership positions in their industry. Part of the company’s falling sales are due to the strong U.S. dollar and sluggish tourism, which are usually cyclical.
And, Victoria’s Secret could be about to boom in China, thanks to the recent opening of L Brands’ first full assortment Victoria’s Secret store in the nation. It is a 25,000-square foot, four-story store in Shanghai. L Brands is planning another store to be opened in Beijing in December. The company is also busily remodeling its stores in the U.S.
While this investment is likely to depress earnings this year, L Brands still expects EPS of at least $3 per share. This is more than enough to cover its dividend, and the company’s investment is likely to pave the way for better growth in the future.
Disclosure: The author is personally long F, STX, and LB.