Are you worried growth stocks are uncomfortably close to their best-possible prices, setting the stage for broad weakness? You're not alone.
The S&P 500's 90% run-up from last March's low has taken it deep into record-high territory, and at least some investors are now unsure these lofty valuations can be maintained. While the scenario is concerning, it shouldn't be interpreted as a reason to bail out of all stocks altogether. It's just a call for a slight strategy shift.
For the foreseeable future, investors might want to focus more on collecting income from dividend stocks and worry less about finding the next great overnight sensation. To get you started, here's a closer look at three dividend names with yields well above 4%.
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Dividend yield: 5.4%
Anyone that's kept tabs on GlaxoSmithKline (NYSE: GSK) in recent years likely knows the healthy yield of 5.4% is more the result of the stock's subpar performance and less a reflection of stellar earnings growth. The future doesn't exactly look thrilling either following the recent failures of mid-stage trials of cancer drugs bintrafusp alfa and feladilimab. Worse, the company's HIV drug dolutegravir will start losing patent protection in 2027, threatening several billion dollars' worth of annual revenue. Last quarter's results were a bit of a bust as well, serving as a microcosm of the past few years. The company is most definitely on the defensive.
As the old saying goes, though, it's always darkest before the dawn. A couple of different turnaround catalysts are already at work, materializing when the company -- and the stock -- is down but not out.
One of these catalysts is the new involvement of activist investment group Elliott Management, which acquired an influential stake in the company in April. Elliott's plans for Glaxo aren't yet entirely clear, but the involvement of this hedge fund firm, led by Paul Singer, suggests the potential is there. It just needs to be unlocked using a different tack.
The other catalyst is that Glaxo is finally moving forward with its long-awaited company split up. Its pharmaceutical business is to be separated from its consumer goods business; Glaxo is also the name behind Sensodyne, Aquafresh, Advil, and Tums, to name a few of its products.
The company has already said the dividend will be cut once its consumer division is no longer part of the mix. Even without knowing the specifics, however, the market seems increasingly aware that a tighter focus and a cash injection will help drive a major revitalization of Glaxo's pharmaceutical operation, perhaps restoring most or all of the dividend payout. As Chief Commercial Officer Luke Miels recently explained to Reuters, "Hopefully over the next couple of years the changes in R&D will be more visible and reflected in the share price."
2. Orange S.A.
Dividend yield: 9.2%
When most U.S. investors are on the hunt for a new telecom name to add to their portfolio, companies like Verizon and even a struggling AT&T come to mind. This makes sense. Investors are familiar with these domestic services.
Limiting a search for dividend stocks to the United States' telecom outfits, however, puts a lot of otherwise great prospects out of contention.
Case in point: France's leading wireless name Orange S.A. (NYSE: ORAN) is currently yielding an incredible 9.2%.
Payouts that big often come with an important footnote. In this case, unlike its U.S. counterparts AT&T and Verizon, Orange isn't absolutely committed to increasing or even maintaining its payout pace each and every year. Some years may be better than others, making it a tricky name to own for investors relying on steady dividend income to help pay for ongoing living expenses.
On the other hand, a yield in excess of 9.2% is tough to ignore, particularly in light of comments made by CEO Stephane Richard in August of last year that turned into action by October.
Although his comments were buried by the noise of the pandemic, Richard vowed to restore the annual dividend to 0.70 euros per share after cutting it to 0.50 euros in 2019. When he made the statement, planned cost cuts were already known and they gave the company the flexibility to make a change. By October, the dividend was ratcheted back up to 0.70 euros per share. Nothing's officially changed in the meantime, but the chatter of more payout increases is still circulating now that those cost cuts are starting to make a noticeable fiscal difference.
3. Williams Companies
Dividend yield: 6.1%
You may know the name as an oil and energy company, but that categorization leads to a potential misunderstanding of its business health. Whereas drillers and explorers such as Marathon Oil and ExxonMobil are subject to risks related to poor crude and gas prices, the Williams Companies is merely a middleman. Its core business is transporting natural gas; it handles roughly a third of all the gas consumed within the United States.
This is an important distinction. Whereas the profitability of drilling varies with oil and gas prices, the need for natural gas is consistent. The United States only used about 2% less gas in 2020 than it did in 2019 despite a wave of business shutdowns stemming from the pandemic.
To this end, Williams' service revenue for 2020 was essentially in line with 2019's figure, and its total measure of gas transported in 2020 mirrored that consistency. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) were actually up 2%. The company is paid by the amount of natural gas it pushes through its pipelines regardless of the price of that gas.
In other words, the Williams Companies is a tollbooth that is very good at what it does. With earnings regularly twice that of its dividend, there's plenty left over to invest in its own growth and still make generous payouts. Its earnings base is growing, too. First-quarter EBITDA improved 12% year over year, prompting the company to up its full-year profit guidance and making even more room for dividend growth in the process.
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