Personal Finance
M

2 Great Dividend Stocks to Buy for 2019

The exterior of the Macy's flagship store in Manhattan

As interest rates for government-guaranteed bonds and CDs have risen over the past couple of years, dividend-paying stocks have lost some of their shine in the eyes of investors. That said, there are still some dividend stocks that yield far more than high-quality bonds or CDs.

Of course, dividend stocks come with risks. For one thing, if the stock price plunges, that could more than offset any dividend payments. Additionally, it's always possible that a company will reduce its payout.

Macy's (NYSE: M) and Pennsylvania Real Estate Investment Trust (NYSE: PEI) are two dividend stocks with extremely high yields following the recent market sell-off. Moreover, they both offer meaningful opportunities for capital appreciation in 2019 and beyond.

An underrated department store stock

Macy's has had a very solid performance in 2018. Through the first three quarters of the fiscal year, comp sales rose 2.7%, driving a return to growth in its earnings before interest, taxes, depreciation, and amortization. The company's sales growth strategy is just starting to pay off, so there could be further sales gains ahead in 2019 .

The exterior of the Macy's flagship store in Manhattan

Macy's has posted solid sales growth recently. Image source: Macy's.

Meanwhile, Macy's debt repayments have lowered its interest expense and tax reform has substantially reduced its effective tax rate. This has driven a 56% surge in adjusted earnings per share to $1.45 on a year-to-date basis.

Nevertheless, Macy's stock has given up most of the gains it achieved in the first half of 2018. On Thursday, the stock fell back below $30, lifting its dividend yield to an impressive 5.2%.

Macy's $0.3775-per-share quarterly dividend works out to an annual payout of $1.51 per share. That's less than half of the company's projected 2019 EPS of $3.63, so the dividend seems fairly secure. In fact, while Macy's hasn't increased its dividend in more than two years, it could potentially do so in 2019, having slashed its debt load by nearly $3 billion since early 2016.

With a much-improved balance sheet and ample free cash flow, Macy's could also resume its share repurchase program in the coming year, driving EPS higher. Considering that the shares now trade for just eight times forward earnings, Macy's looks like a great dividend stock that could also deliver substantial capital appreciation in 2019 if sales trends remain solid.

A misunderstood mall REIT

As generous as Macy's dividend looks, it pales in comparison to the yield that PREIT stock offers today. Shares of the mall owner have lost half of their value since June -- including a big drop in the past week -- and fell below $6 on Thursday, putting them at their lowest level since the Great Recession. Based on its Thursday closing price of $5.80 and quarterly dividend of $0.21 per share, PREIT stock has an incredible 14.5% annualized dividend yield.

PREIT 2018 stock performance. Data by YCharts .

Between the huge drop in PREIT's stock price and its sky-high dividend yield, you might think that the REIT's earnings power is plunging and its dividend is clearly unsustainable. However, PREIT is fairly well positioned, despite the liquidation of regional department store operator Bon-Ton Stores earlier this year and the potential liquidation of bankrupt Sears Holdings in 2019.

Indeed, PREIT has been proactively replacing the weaker department stores at its properties with stronger tenants. In fact, there are only eight unfilled Sears and former Bon-Ton stores left in PREIT's portfolio, several of which are at malls that are mortgaged and may be handed over to the lenders in the next few years.

For the most part, PREIT's malls are performing quite well. Management expects funds from operations (FFO) -- a key earnings metric for REITs -- to come in between $1.52 and $1.57 per share this year, down just slightly from $1.58 per share in 2017.

PREIT expects to add $14 million in annualized rental income ($0.18 per share) by 2020 from completing redevelopment projects at several malls. Furthermore, its $400 million Fashion District Philadelphia joint venture project is slated to open next fall. As a result, FFO will likely return to solid growth in late 2019 or 2020.

There is a chance that PREIT will reduce its dividend somewhat to free up more cash for future redevelopment projects. But it would still offer a very high yield, and that redevelopment work could pave the way for a return to strong earnings and dividend growth after 2020.

Two compelling choices

Between these two dividend stocks, Macy's looks like the lower-risk bet for investors. Sales and earnings are already moving in the right direction, so it may not take much to get investors excited about the stock again. Additionally, Macy's has a massive trove of real estate that is likely worth more than the company's enterprise value, providing a measure of safety.

PREIT is riskier, because it has a high debt load and could continue to face some headwinds from anchor store closures in the next few years. That said, most of its malls are desirable properties that should remain vibrant shopping destinations for the foreseeable future -- and the stock offers more upside than Macy's. Indeed, if it can get FFO growing again, PREIT stock could more than double in the next two to three years.

10 stocks we like better than Macy's

When 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 Macy's 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 November 14, 2018

Adam Levine-Weinberg owns shares of Macy's and Pennsylvania REIT. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

M PEI

Other Topics

Stocks

Latest Personal Finance Videos

    #TradeTalks: The Changing E-Commerce Landscape

    e-Commerce Consultant James Thomson joins Jill Malandrino on Nasdaq #TradeTalks to discuss the changing e-commerce landscape, what consumers should prepare for as we head into shopping season and why you shouldn’t do last minute shipping.

    5 days ago

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More