With stocks bumping along near all-time highs, it can be hard for income investors to find generous dividend yields of 4% or higher, as tech giant IBM (NYSE: IBM) promises to its shareholders. And payouts that are this high often come with significant operating risks, a cratering stock price, or both.
Below, Motley Fool investors highlight three dividend stocks that offer an attractive balance of current income and the potential for capital gains over the long term. Read on to see why Cedar Fair (NYSE: FUN), BP (NYSE: BP), and MGM Growth Properties (NYSE: MGP) topped this list.
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Buckle up for a 6% yield
Demitri Kalogeropoulos (Cedar Fair): Investors reacted harshly to Cedar Fair's latest business update, and the corresponding drop in shares has pushed the stock's yield to nearly 6%. That slump could represent an attractive opportunity for patient income investors.
The amusement-park operator kicked its summer season off on a weak note, with attendance falling 3% through the Fourth of July holiday weekend. The decrease surprised the management team; it was only partially offset by higher in-park spending, and by improved results from the resort accommodations segment.
Cedar Fair is hoping that the new rides it launched, including the Steel Vengeance and HangTime coasters, will help it push attendance back into modestly positive territory during the peak vacation months of July and August. That's possible, but it's also likely that profit margin will drop as the company relies on more aggressive promotions to keep its turnstiles moving. Its long-term plan relies on its steady development of the real estate around its parks, to expand the capacity of those resorts over time.
Meanwhile, even at the slower sales pace, Cedar Fair's strong cash flow should support the current dividend, as well as management's long-term goal of boosting its payout by 4% each year, right along with expected earnings growth.
Good and getting better
John Bromels (BP): The good times are rolling for British oil and gas giant BP, thanks to higher oil prices. Like the rest of its "big oil" peers, the company has been raking in cash from its upstream (exploration and production) arm, while doing a surprisingly good job of holding downstream (refining and marketing) operations steady in the face of higher prices.
Of course, integrated oil majors like BP have long been a favorite of dividend investors, and BP's 5.4% current yield is almost best-in-class -- rival Royal Dutch Shell's is currently just a few hundredths of a percent higher. But yield isn't everything. One major question for the company is whether it can make a compelling long-term investment, even if oil prices drop. The good news for investors is that the company seems to be making large strides in that direction.
On the most recent earnings call -- for the first quarter of 2018 -- CFO Brian Gilvary brought up BP's "breakeven point," the price per barrel of oil at which BP would be able to cover its costs of bringing that barrel to market with nothing left over. He said, "[W]e continue to expect the organic breakeven for the Group to average around $50 per barrel on a full dividend basis in 2018, reducing steadily to $35 to $40 per barrel by 2021, in line with growing free cash flow."
If BP can successfully execute this plan -- and there's no indication it won't be able to -- then it will turn a profit even if oil prices drop below $50 per barrel in 2021. Considering those prices are currently above $70 per barrel, BP should be able to keep the good times rolling -- and investors happy -- for years to come.
Not gambling with this investment
Rich Duprey (MGM Growth Properties): Casino-focused real estate investment trust MGM Growth Properties may be a way for investors to bet on growth in both casino and real estate markets without taking on too much risk.
Like all REITs, casino REITs don't pay income tax like regular companies do: They are required to pay 90% of their income back to shareholders, allowing them to remain exempt from paying income taxes on the profits paid to investors. The yields on dividend payments also tend to be tasty, and that's the case with MGM Growth Properties, which currently yields 5.6% annually.
Unlike other casino REITs such as Gaming & Leisure Properties and VICI Properties, MGM Growth remains closely tied to the casino that spun it off, MGM Resorts International (NYSE: MGM), which still owns 73% of its business.
That could work against it, since it is not independent of the casino -- it may not be able to charge appropriate market-rate rents on its properties, since MGM could nix that. Also, investing in the properties themselves would be a joint decision, though it does mean the REIT and the casino operator are in it together.
In its favor is the fact that the properties it owns are geographically diversified. The REIT recently announced it was buying Yonkers Raceway and Empire City Casino from MGM, as the casino operator prepares for legalized sports gambling in New York. The two should benefit from the opportunity.
With its parent well situated in the casino market and its own fortunes secure in the REIT industry, MGM Growth Properties could be a bet investors will want to make.
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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. John Bromels owns shares of BP. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.