Whether you are looking to supplement your income or looking to build wealth over very long periods of time, dividend stocks that can reliably pay you for years and gradually increase their payout can be a powerful part of your portfolio. What's even better is when you can buy those stocks at cheap prices, because it typically means they carry high yields.
While there are likely loads of candidates out there that fit this description, three companies have stood out to me as high-yielding dividend stocks you might want to consider for your portfolio: pipeline master limited partnership MPLX (NYSE: MPLX), telecommunications giant Verizon Communications (NYSE: VZ), and mining titan Rio Tinto (NYSE: RIO).
Continue Reading Below
High yield, huge growth prospects, and a well-managed business
One place you can routinely find high-yield dividend stocks is in the midstream section of the oil and gas business. These are the pipelines, processing, and logistics businesses that are typically structured as master limited partnerships. Today, that is a business with surprisingly large investment opportunities, with oil and gas pipelines busting at the seams -- not literally, thankfully -- with production from shale.
Trouble is, there are a lot of poorly run businesses in this industry. Management teams that prioritize payout growth or want to impress investors with massive project backlogs tend to play fast and loose with debt levels and using equity to pay for growth. For investors to really make money in this business long term, they need to be very selective about which management teams to back.
MPLX, in my opinion, is one of the better-run businesses in this industry and has a management team I'm confident enough to support with my own money. It has done a great job of growing its payout, investing in a sizable basket of projects, while at the same time maintaining an investment-grade credit rating and lower-than-industry-average levels of debt.
With a distribution yield of 6.8% today, a plan in place to grow its payout by 10% this year, and a healthy stable of investments lined up to maintain that growth, MPLX's shares are looking more attractive by the day.
Investing now for market superiority later
Verizon is by no means a stock that is going to blow your socks off with huge growth rates. The market for providing wireless communications is a mature, highly competitive one. Pretty much every telecommunications company has a 4G network deployed, so companies have to fight hard on price to keep customers subscribed to their service.
At the same time, though, the telecommunications business is at a crucial point as companies race to deploy the next-generation 5G network. Upgrading a network to 5G capability is going to be costly, which actually plays to Verizon's strengths as one of the largest wireless providers out there.
In fact, Verizon is making a monumental step in a few weeks to offer 5G to its broadband internet customers in a few select metropolitan markets. This should be a major toehold with which Verizon can build out its wireless 5G network in the next few years. In 2018 alone, the company expects to spend $17.9 billion on maintaining and upgrading its network. If it can deploy a 5G network faster than its peers, it will be able to offer a differentiated product that can attract customers and not have to worry as much about competing on price. That could go a long way in helping to boost those stagnant revenue numbers.
Since full 5G deployment is still a long way off, we're in a situation where the company is still in a fierce pricing fight for customers but is spending loads of money to get its network built out. That isn't exactly a situation conducive to dividend growth today, but with shares trading at seven times earnings and a 4.3% dividend yield, it seems like a reasonable price to pay and wait to reap the benefits of a 5G network.
A good time to buy a tough industry
Mining isn't an easy business, and stocks in this industry are highly cyclical. So I can understand why mining giant Rio Tinto might not be every investor's cup of tea. However, if you can catch a quality mining business at the right time of the cycle, it can generate good returns. This is looking like one of those times, and Rio's stock is priced just right for that opportunity.
The period from 2010 to 2016 was going from the best of times to the worst of times for mining stocks. The materials euphoria that swept the market at the beginning of this decade was fueled by China's seemingly insatiable appetite for materials, and companies invested billions in expensive mining projects. As the 2010s marched on, though, China's demand for commodities started to slow down just as many high-cost projects started to produce. As a result, prices for numerous metals and materials continued to slide. Mining companies were forced to shut down uneconomic mines, slash dividends, and do what they could to repair their balance sheets after previously loading up on debt.
Since then, though, the mining industry has started to show signs of life. After such a thorough spanking from the market, mining executives have started to focus on cutting costs and more efficient capital spending. Rio Tinto was one of the companies that learned these lessons well and now has a competitive portfolio of mines and a manageable debt load, and has enough free cash flow that it is planning billions in share repurchases on top of its current dividend that yields close to 6%.
Industry cycles for commodities can change rather quickly if economic growth stagnates or if companies get tempted to chase growth. That said, this looks like one of the better times to invest in mining, and Rio Tinto looks like one of the best around to capitalize on that.
10 stocks we like better than Verizon CommunicationsWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Verizon Communications wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of August 6, 2018