Dividend investors face a constant dilemma: They want to maximize the yield they receive from income stocks, but they also need to ensure that the companies they invest in have sustainable dividends and business models. Generally, the higher the yield, the greater the risk to the business model or dividend.
But not all income stocks with high dividend yields are trouble. We asked three of our Foolish investors to name a top stock with a high dividend yield that they believe income investors should consider looking into. Rising to the top of the list were coal producer Alliance Resource Partners (NASDAQ: ARLP) , food service distribution company Sysco Corporation (NYSE: SYY) , and tech giant IBM (NYSE: IBM) .
Fuel up your portfolio with this nearly 11% yield
Sean Williams(Alliance Resource Partners): Though there are dozens upon dozens of high-yield dividend stocks for investors to choose from, few offer a better management team and long-term operating consistency than coal producer Alliance Resource Partners.
I know what you're probably thinking right now: "Isn't coal getting its behind kicked by solar, wind, and natural gas?" In many respects, yes. Weaker natural gas prices for a stretch of time encouraged utilities to switch from coal-fired electrical power to natural gas. This, in turn, led to a glut of coal supply, weaker coal prices, and a handful of bankruptcy filings from some of the industry's bigger players. As for Alliance Resource Partners, it was never at risk of going belly up.
One of the top allures of Alliance Resource Partners is its relatively pristine balance sheet, which gives the company more financial flexibility than any other company in the industry. It ended the third quarter with $385 million in long-term debt, down $14 million from where it began the year. By comparison, many of its peers are lugging around $1 billion or more in long-term debt.
Another key to the company's success is how it approaches finding customers for its coal. It generally locks in deals one-to-three years in advance, which winds up exposing very little of its production to wholesale price fluctuations. The company is fully committed for 2017 and has a respective 23.1 million tons, 11 million tons, and 7.3 million tons contracted for 2018, 2019, and 2020, as of the end of the third quarter.
Speaking of the third quarter, Alliance Resource Partners also upped its already enormous dividend by 1% to $2.02 annually ($0.505 per quarter), which pushed its yield up to 10.7%. That is, in my mind, perhaps the highest sustainable yield you can find right now. If you want a top high-yield dividend stock, look no further than Alliance Resource Partners.
A market leader with a beefy yield
Sysco's competitive edge is its scale. By far the industry's largest player, Sysco has a distribution network that enables it to deliver what restaurants need on a timely basis and at an affordable price.
The underlying business is an impressive cash flow generator. The company generated about $1.5 billion of free cash flow in the past 12 months, helped partially by a faster cash conversion cycle . It's my view that Sysco can post mid-single-digit cash flow growth over the long haul from low-single-digit revenue growth, with cost cuts helping to drive margin expansion. Nelson Peltz, a famed activist investor, remains on the company's board of directors.
Notably, households are now spending about as much on food away from home as they spend on food at home. The share of food purchased away from home has only increased over time, but a meaningful shift toward at-home eating is the biggest long-term risk to the company. That said, it's my view that America's love for restaurants is not a passing thing, but part of American culture. We love eating away from home, which is good news for those who collect a high yield from Sysco stock quarter after quarter.
Stack dividends with Big Blue
Keith Noonan (IBM): IBM has struggled amid weakening demand for its legacy hardware and software systems, and investors should approach the stock with the understanding that there could be more challenges ahead, but Big Blue presents an appealing play for income investors. Its stock boasts a 4% yield, and a 42% payout ratio and 22-year history of consecutive annual payout increases suggest that shareholders can bank on seeing its disbursement continue to rise each year.
Shares trade at just 12.5 times trailing earnings, which compares favorably with its industry average P/E of roughly 20 and the S&P 500 's trailing earnings multiple of roughly 22, and there are signs that the company's turnaround is heading in the right direction . IBM's cloud computing, analytics, security, and mobile software businesses now account for roughly 45% of sales, and the company's entrenched position in the enterprise market positions it to capture continued growth in these categories. Trailing cloud software-as-a-service sales reached $9.4 billion in its September-ended quarter, up 25% over the prior-year period. Momentum for these dependable subscription revenue streams bodes well for the long term.
The company's ongoing share buybacks should also create earnings momentum and pave the way for payout growth. IBM has reduced its shares outstanding by roughly 17% over the past five years and recently raised its buyback authorization another $3 billion to reach $4.5 billion -- or roughly 3% of its current $140 billion market cap.
With its combination of viable turnaround prospects, a cheap valuation, and a big yield, IBM is one of the top dividend stocks in the tech sector.
10 stocks we like better than IBM
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Jordan Wathen has no position in any of the stocks mentioned. Keith Noonan has no position in any of the stocks mentioned. Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends Alliance Resource Partners. 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.