The S&P 500 sports a paltry dividend yield below 1.9%, the result of a raging bull market that has pushed stocks higher over the past nine years. If you want a higher yield, individual stocks are the way to go.
But which dividend stocks should you buy? Here are three stocks with yields above 3% that some of our Foolish investors think you should consider. Read on to see why Nordstrom (NYSE: JWN), International Business Machines (NYSE: IBM), and Kinder Morgan (NYSE: KMI) deserve a place in your dividend portfolio.
A can-do retailer
Rich Duprey (Nordstrom): Normally in the current environment I wouldn't recommend the stock of a retailer, but department store chain Nordstrom just might be different enough to warrant closer inspection.
While the retailer is going through the same spasms the rest of the industry is experiencing, it truly possesses an independent board of directors that may have the wherewithal to change the store's dynamic. It's not often you'll find a board with the chutzpah to challenge the company's founding family -- and who serve on the board with them! -- yet Nordstrom's board has done just that with the family's attempt to buy out the company and take it private.
The Nordstrom family offered $50 a share in a go-private deal that the board rejected virtually immediately as insufficient. Moreover, they essentially told the family members to stop wasting the board's time: Either come back with a better, higher offer -- and do it quickly -- or abandon the project altogether. They also halted sharing due diligence information with the family.
After only a few weeks and no new offer was made, the board said they were moving on and would instead focus on turning the company around. It ought to make for some awkward board meetings going forward, but that's the sort of independence shareholders should be looking for.
Nordstrom does have the potential to turn around its business, too. It is investing more heavily in its successful off-price Rack stores while de-emphasizing the full-price ones. In the fourth quarter, the Rack brand saw net sales rise 15% while comparable sales increased 3.7% and even its full-line stores saw growth with increases of 6% and 2.8%, respectively.
The retailer trades at 16 times earnings, 13 times next year's estimates, and at a fraction of its sales. While its price-to-free-cash-flow ratio of 18 doesn't make it a bargain-basement stock, it is sufficiently discounted that coupled with its dividend that currently yields 3.2%, Nordstrom may be the best bet on a retailer that can survive in the age of Amazon.com.
A high-yield tech stock
Tim Green (International Business Machines): One silver lining of owning a stock that's slumped is that the dividend yield rises, giving you the opportunity to increase your stake and lock in a higher yield. Shares of IBM are down nearly 30% since peaking about five years ago. The dividend has kept marching higher, pushing the yield up to about 4%.
IBM is a company in transition. It's been investing in areas including cloud computing and artificial intelligence while shifting away from some legacy businesses that no longer produce acceptable results. The company returned to revenue growth in the fourth quarter of last year, and it expects to grow revenue this year on the strength of these newer growth businesses and its latest mainframe system.
The market doesn't quite believe that IBM's comeback is for real. The stock trades for just 11 times the company's adjusted earnings guidance, suggesting that a cloud of skepticism still hovers over the century-old tech giant. The company's long-term target is to grow earnings per share by a high-single-digit percentage each year. If it can get there, I suspect that skepticism will wither away.
IBM will likely boost its dividend in April, bringing its streak of consecutive annual dividend increases up to 23. That long track record, a high yield, and a pessimistic valuation are three good reasons to consider buying the stock.
A sneaky high yield
Matt DiLallo (Kinder Morgan): Natural gas pipeline giant Kinder Morgan has gotten off to a rough start in 2018, falling about 10%, which pushed its stock below $17 per share. As a result, it currently yields more than 3%. That attractive payout is among the safest around since it only consumes about a quarter of the company's incredibly steady cash flow.
That said, as appealing as Kinder Morgan's current yield might be, it's just a fraction of what it will be in the coming years. That's because the company said it would boost its payout 60% this year, which would push the yield up over 5%. Meanwhile, the company plans on increasing it another 25% next year and in 2020. Add it up, and Kinder Morgan expects to raise its dividend 150% in the next three years, which would push its yield up above 7.5% for those who buy today.
That future payout, like today's, should be on a firm foundation. That's because the company has enough growth projects under way so that 2020's dividend level shouldn't consume more than 50% of its cash flow, which is very conservative for a pipeline company, as many of its peers pay out more than 80% of their cash flow each year. That combination of a fast-growing income stream backed by strong financial metrics makes Kinder Morgan one of the top dividend stocks to consider these days.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Matthew DiLallo owns shares of AMZN and Kinder Morgan. Rich Duprey has no position in any of the stocks mentioned. Timothy Green owns shares of IBM. The Motley Fool owns shares of and recommends AMZN and Kinder Morgan. The Motley Fool is short shares of IBM. The Motley Fool recommends Nordstrom. The Motley Fool has a disclosure policy.