2 Top Dividend Stocks for Your Roth IRA

Markets Motley Fool

It's never easy finding great stocks trading at reasonable prices and sporting high yields. You have to wait for a market downturn or find companies that are out of favor for some reason. Helmerich & Payne, Inc. (NYSE: HP) and International Business Machines Corp (NYSE: IBM) are two high-yielding dividend stocks that fall into the latter category. They're both smart choices to juice the tax-free income you get out of your Roth IRA.

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Cyclical industry, steady dividend

Helmerich & Payne yields an impressive 6.2% today. That's largely because it operates in the oil and natural gas drilling business, which is highly cyclical and currently out of favor. But here's the really exciting thing: The company has increased its dividend every year for 44 consecutive years despite operating in a cycle-driven industry.    

To be fair, there are real things to worry about. For example, Helmerich & Payne only has about half of its U.S. onshore drilling fleet working today. This business accounts for roughly 90% of its rigs. However, the 52% utilization rate in the fiscal third quarter was more than double the 24% experienced in the same quarter a year ago. So the worst of the downturn appears over.    

Another positive is Helmerich & Payne's industry position. It is the market-share leader in the U.S. onshore market with the most modern fleet of rigs. That's important because its customers have increasingly been shifting toward alternating current (AC) rigs, which are more efficient and flexible than older rigs. With more AC rigs, Helmerich & Payne is in position to serve customers looking to stay on the cutting edge. And, for better or worse, it has more idle AC rigs than its direct peers, too, meaning that it could gain even more share if drilling activity continues to pick up.    

You might still be worried about getting into a highly cyclical industry. That's reasonable, but also consider that Helmerich & Payne's balance sheet is rock solid. Long-term debt makes up only around 10% of the capital structure and the current ratio -- a measure of a company's ability to pay near-term bills -- is a robust 3.7. There's definitely risk here, but the high yield, long history of annual dividend hikes, and solid balance sheet should help calm your nerves.    

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Turning around a giant ship

The next candidate to consider for your Roth IRA is tech titan IBM. The company currently yields 4.1% and boasts a 22-year history of annual dividend hikes. That, of course, is the good news. The bad news is that the yield is so high because IBM is going through a painful business transition.    

IBM Dividend Per Share (Quarterly) data by YCharts

How bad is it? Revenue has declined for 21 consecutive quarters. That's more than five years of falling sales because the revenue from new businesses hasn't been able to offset the loss of revenue from sold and declining businesses. Investors are clearly worried that IBM isn't going to be able to right the ship. And if you take a cursory look at the balance sheet, long-term debt makes up a worrying two-thirds of the capital structure! A falling top line and a heavy debt load are not good signs.    

Let's address those issues one at a time starting with the easy one: debt. Around 80% of IBM's long-term debt is related to the tech giant's financing arm. This business supports the company's sales. There's a risk that these loans won't get paid, of course, but this debt is backed by sales and long-term contracts. Pull that debt out and long-term debt only makes up around 30% of the capital structure. That's a completely reasonable number. Meanwhile, the current ratio is a healthy 1.25. IBM is in solid financial shape with plenty of room to maneuver.    

The business transition is a little more complicated. For starters, IBM is a massive ship to turn around. So it's not surprising that a big makeover would be slow moving. As for the likelihood of success, IBM is more than 100 years old -- it's successfully transformed its business before. There's no reason to doubt that it won't be able to do it again, as it continues to shifts from older businesses, like making computers, toward new businesses like security, cloud computing, data analytics (Watson), social, and mobile.

One good sign that it hasn't lost its edge is its continued lead in annual patent wins. It's been awarded more patents than any other company for 24 consecutive years, besting the runner-up's tally last year by a massive 45%. Although many of these patents are related to technology that we won't see for years into the future, this is a clear demonstration that IBM is still the type of company that can, and is, driving change in the technology industry.    

IBM Normalized Diluted EPS (Annual) data by YCharts

And then there's the company's profitability. Despite a falling top line, robust profit margins and stock buybacks continue to support IBM's earnings. Over the past decade, revenues are down around 20% but earnings have gone up over 75% despite relatively weak bottom line results in the last few years. With regard to the dividend, fellow Fool Keith Noonan recently noted that the tech giant's free cash flow easily covers its dividend payments. Put it all together and IBM still looks like a leading technology company with the financial strength to change with the times -- even if the process is taking longer than investors would like.    

Foolish takeaway

There's no question that there are risks at Helmerich & Payne and IBM. They wouldn't be offering investors such high yields if there weren't. However, when you dig into the businesses a little bit, the risks start to look less frightening, which makes the high yields each offers even more enticing. If you stick this pair into a Roth IRA, you'll be able to use them to generate a healthy stream of tax-free income.

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Reuben Gregg Brewer owns shares of IBM. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.