3 High-Yield Stocks Still Worth Buying

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Generous dividend yields often serve as red flags, marking out deeply troubled businesses more often than they show great long-term income generators. But there are exceptions to every rule.

Our panel of Motley Fool contributors today found a handful of stocks with that rare combination of beefy dividend yields and solid business prospects. STORE Capital (NYSE: STOR), International Business Machines (NYSE: IBM), and Cisco Systems (NASDAQ: CSCO) appear poised to deliver fantastic dividends.

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A Buffett-backed REIT

Brian Feroldi (STORE Capital): Warren Buffett knows a thing or two about stock picking, so my ears perked up last year when he took a 10% position in a little-known real estate investment trust (REIT) called STORE Capital.

Why is Buffett attracted to this REIT? I think the answer lies in the company's unique business model.

Like most REITs, STORE raises capital from investors and uses the proceeds to buy real estate. Those properties are then rented out and the profits are passed back to investors in the form of a rising dividend.

However, STORE has a few attributes that help it stand apart from other REITs:

  • STORE only buys freestanding retail buildings that are insulated from the rise of e-commerce sales (restaurants, fitness centers, auto repair shops, movie theaters, etc....).
  • Tenants are required to sign long-term, triple-net leases.
  • Tenants are required to regularly submit financial statements to STORE so they can continually prove that they are capable of making their lease payments.

When combined, these factors have kept occupancy rates above 99% for many years. That's why this REIT is as rock-solid as they come.

Looking ahead, STORE believes that 200,000 properties match its investing criteria, which is an enormous number when compared to the company's current portfolio of "just" 2,100 properties. That gives it ample room for continued growth.

To top it all off, STORE offers up a market-beating dividend yield of 4.3%. That makes this a great stock for growth and income investors alike to get to know.

Big gains and a solid dividend

Tim Green (Cisco Systems): Shares of networking hardware company Cisco have been on a tear. The stock is up nearly 50% over the past year, and it's nearly doubled over the past five years. Revenue is growing again after two years of declines, and the company's shift toward software and recurring revenue is paying off.

On top of improving results, the tax bill passed late last year allowed Cisco to give its capital return program a boost. The company is working through a $25 billion share buyback program, and its quarterly dividend was raised by 14% earlier this year to $0.33 per share. Even after the rally, the stock still yields about 2.7%. That's not as high as some of its big tech peers, but it still easily beats the S&P 500.

Cisco stock isn't nearly as cheap as it was a year ago, but it's still not overvalued. Analysts expect full-year adjusted earnings of $2.98, putting the price-to-earnings ratio at roughly 16. For a company with serious competitive advantages, that's not a bad price to pay.

In the near term, the escalation of the trade war between the U.S. and China could hurt Cisco's results. The latest round of tariffs on $200 billion of Chinese imports included networking hardware. That could push down Cisco's margins, at least temporarily. But for dividend investors willing to weather whatever storm these tariffs bring, Cisco is a great long-term pick.

Milk this Big Blue cash machine

Anders Bylund (IBM): This ain't your grandfather's Big Blue anymore, but one detail about the technology powerhouse seemingly never changed. If you knew IBM as a high-yield dividend machine back in the 1990s, that's exactly what you get today as well.

There was a time when this wasn't true. The company slashed its payout in 1992, then left its dividend policy on virtual life support for many years. During the dot-com boom, that anemic attitude toward dividends combined with skyrocketing share prices to drive IBM's yield down to a fraction of one percent.

That changed again in the mid-2000s. Over the last 12 years, IBM pushed its dividend payouts more than 420% higher while share prices rose by a more modest 80%. Yes, disappointing share price gains are partly to blame for this rising yield -- but a real commitment to shareholder-friendly cash returns played an equally significant part.

There's plenty of room for even further dividend growth, since IBM is using less than 50% of its free cash flows to power that policy. At the same time, management says that the company is standing on the brink of a breakthrough. IBM's so-called strategic imperatives now account for more than half of the company's quarterly sales, providing a springboard toward serious long-term growth.

Once investors at large realize that IBM has turned that corner, share prices should start climbing again. Starting a position at today's low prices will not only set you up for big gains as that thesis plays out but also lets you lock in a fantastic effective dividend yield of 4.2%.

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Anders Bylund owns shares of IBM. Brian Feroldi has the following options: short January 2019 $185 puts on IBM, short January 2019 $180 puts on IBM, long January 2020 $170 calls on IBM, and short January 2020 $170 puts on IBM. Timothy Green owns shares of Cisco Systems and IBM. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.