High-yield dividend stocks tend to be particularly risky types of investing vehicles that aren't well-suited for conservative individuals. Even so, there are a handful of rare gems that do, in fact, offer both an acceptable level of risk and an above-average yield.
Armed with this insight, we asked three of our investors which high-yield dividend stocks they think might appeal to investors with a low tolerance for risk. They suggested Pfizer (NYSE: PFE), AT&T (NYSE: T), and Valero Energy (NYSE: TWX). Read on the find out why.
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A pharma play with a sustainable high yield
George Budwell (Pfizer): If you're on the hunt for outsize dividend yields but also happen to be risk-averse, the pharma giant Pfizer might be a perfect fit for your portfolio. Here's why.
According to the EvaluatePharma World Preview 2017 report, Pfizer is expected to continue to battle for the title of the world's largest drugmaker heading into 2022 -- despite facing the loss of exclusivity for both Viagra and the blockbuster pain drug Lyrica. This positive outlook implies that the company can, in fact, offset any anticipated dips in revenue from either of these top-selling brands, which is key. To do so, Pfizer is counting on its rapidly emerging portfolio of newer growth products that include the breast cancer drug Ibrance and the advanced prostate cancer medicine Xtandi, among many others.
The take-home message is that Pfizer's stellar free cash flow, which exceeded a whopping $15.3 billion in the past 12 months, shouldn't waver too much over the next few years, given the healthy commercial prospects of its next-generation products. As a result, the company shouldn't feel compelled to reduce its dividend going forward -- even though the drugmaker's trailing-12-month payout ratio of 90.5% is admittedly on the high end.
All in all, Pfizer's rather attractive yield of 3.91% appears to be safe for the long term because of the company's proven ability to continually refresh its product portfolio in a timely manner, making it an ideal stock for risk-averse income investors.
A dependable telecom leader
Keith Noonan (AT&T): For investors looking for an inexpensive stock that provides stellar income generation, there aren't may companies that fit the bill better than AT&T. A 5% yield and a 32-year run of annual payout increases establish the company's dividend bona fides. Besides, AT&T's business actually looks quite sturdy despite some near-term challenges.
While its wireless service is facing pressure from lower-priced competition from Sprint and T-Mobile, AT&T has an advantage that should become more pronounced with the upcoming launch of 5G networks. Similarly, DIRECTV is facing net subscriber erosion, but AT&T has managed to increase the number of subscribers who have both its wireless and television offerings 31% over the last two years, and its bundling strategy could open up more opportunities ahead.
The company's foothold in wireless and television services puts it in great position to be a leader in over-the-top wireless television -- especially if its acquisition of Time Warner (NYSE: TWX) goes through. The potential pricing advantage for hypothetical bundles combining wireless service with content like DIRECTV's NFL Sunday Ticket and Time Warner's HBO platform is something competitors would likely struggle to match. The company has also communicated that it expects the Time Warner merger to have a positive effect on dividend growth, which would be good for income-focused investors.
Adding to the stock's defensive profile is AT&T's five-year beta value of roughly 0.5. This means that for every 2% that the market moves, AT&T will theoretically move around 1% -- a quality that suggests it's a good stock for giving your portfolio a buffer against volatility. Trading at roughly 13 times forward earnings estimates, AT&T's status as a relatively stable stock that packs a big dividend makes it a top candidate for conservative investors.
An addition that would make your dividend portfolio more energetic
Dan Caplinger (Valero Energy): The energy sector has gotten hit hard over the past couple of years, but not every portion of the industry has suffered as a result of falling crude oil prices. For Valero Energy, cheaper oil means saving money on obtaining the raw materials that the refiner needs in order to produce gasoline, diesel fuel, and other refined energy products. That's a big part of why even as most energy stocks have plunged over the past couple of years, Valero has posted modest gains while still paying investors a dividend that currently yields more than 4%.
Valero doesn't come without risk. The refiner depends on being able to earn profit from the spread between what it pays for crude and what it receives from selling refined products, and falling gasoline prices have put pressure on profit levels. Moreover, refiners face high compliance costs that eat into their bottom line, and Valero has faced hundreds of millions of dollars of expenses each quarter from regulatory requirements related to the renewable fuel standard.
What Valero does offer is exposure to energy without the full risk that comes with shares of exploration and production companies. In a cyclical business that has been going through a down period for a while, Valero stands to benefit greatly when refining comes into its own again, and many investors increasingly believe that such a shift could come sooner rather than later.
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Dan Caplinger has no position in any of the stocks mentioned. George Budwell owns shares of Pfizer. Keith Noonan has no position in any of the stocks mentioned. The Motley Fool recommends Time Warner and T-Mobile US. The Motley Fool has a disclosure policy.