Income investors can get burned just as badly -- if not worse -- than growth stock fans. Yield chasers can be lulled into complacency by chunky quarterly payouts, only to realize that the basement floor can crack when the distributions aren't sustainable.
There are still plenty of stocks shelling out modest dividends that seem to be priced too compellingly to ignore at this point. Let's go over Starbucks (NASDAQ: SBUX), GameStop (NYSE: GME), and AT&T (NYSE: T), three stocks that are standing out as intriguing investments after recent sell-offs.
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Starbucks: 2.5% yield
The lowest-yielding stock in this article may be the one with most to prove. A lot of things have gone wrong for leading premium coffeehouse chain Starbucks lately, driving the stock to a 34-month low. Frappuccino sales have declined this year as cheaper rival offerings and health concerns weigh on the ice-blended beverages. Comps growth continues to decelerate, down to 2% in its two most recent quarters, with Starbucks now eyeing a 1% uptick for the current quarter.
The cherry on top of this whipped-cream-topped frosty beverage is that its 50-year-old CFO stunned investors last week by announcing that he would be retiring. The good news is that Starbucks hasn't been this cheap in a long time. The stock is now selling for 20 times this year's projected earnings and 18 times next year's target. These aren't cheap multiples for out-of-favor entities, but it's a steal for an iconic consumer-facing juggernaut of a brand.
GameStop: 10.4% yield
It's hard to argue that GameStop will be around a decade from now. With every passing year, more diehard gamers are relying on digital delivery for their gaming sessions, spelling eventual doom for a model based on the sale and higher-margin resale of consoles and physical video game media. Investors know this, and that's why they're willing to let this cash-flow-generating beast trade for less than five times this year's projected profit.
Aggressive share buybacks have masked the serious decline in profitability. The fat yield has kept income investors close. However, unlike other stocks with nosebleed payout ratios north of 100% supporting double-digit percentage yields, GameStop is still at least a couple of years away from when investors need to start worrying about the sustainability of its distributions.
A lot can happen between now and the end of GameStop. A buyout can happen, likely the chain's best shot at long-term survival as the makeover can happen away from the public stage and the requirements for quarterly touched-up smiles. GameStop can also reinvent itself through acquisitions and strategic shifts away from physical gaming gear. I've been hard on GameStop over the years -- and justifiably so -- but the pessimism seems overdone at this point.
AT&T: 6.2% yield
It took nearly two years, but AT&T finally completed its acquisition of the now renamed WarnerMedia. There are so many layers to AT&T now, and between satellite television giant DirecTV and the content mother lode that is WarnerMedia, this isn't just a company living and dying by smartphone and traditional telco services. It celebrated by making another acquisition, the less contentious purchase of AppNexus in a smaller deal that will beef up its advertising prospects.
We'll have to see the synergies play out with WarnerMedia in the next couple of years, but the market seems to be casting off AT&T into the discount bin without giving it a shot. AT&T has a forward earnings multiple in the single digits, and it's another high-yielding stock with a reasonable payout ratio. The various pieces of AT&T fit, and the dividend rewards the patient investors waiting until Wall Street figures it out.
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Rick Munarriz owns shares of AT&T. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool owns shares of GameStop and has the following options: short July 2018 $14 calls on GameStop. The Motley Fool has a disclosure policy.