This is a guest contribution by Bob Ciura of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth portfolios for the long run.
With the stock market near record highs, the average dividend yield in the S&P 500 Index has dropped to 1.3%. As a result, income investors largely have to settle for less dividend income when buying stocks. However, there are still quality companies with high dividend yields well above 5%.
Investors do not have to sacrifice income when it comes to Exxon Mobil (XOM), Altria Group (MO), and SL Green Realty (SLG). These three stocks have leadership positions in their industries, dividend yields above 5% and secure dividend payouts.
High Yield Stock: Exxon Mobil
Exxon Mobil is an oil and gas giant with a market capitalization above $240 billion. As a major energy producer, Exxon Mobil has benefited greatly from rising oil and gas prices. After commodity prices crashed last year amid the pandemic, Exxon Mobil has gotten a huge lift now that Brent crude is back above $70 per barrel.
The company has seen a notable recovery in 2021, thanks to the steady reopening of the U.S. economy as the pandemic unwinds. In the second quarter, Exxon Mobil generated a profit of $4.7 billion, compared with a loss of $1.1 billion in the same quarter last year. Cost reductions have also improved Exxon’s profitability, as capital and exploratory expenditures were reduced by nearly half over the first two quarters of 2021.
Total production of 3.6 million barrels per day declined 2% from the second quarter of 2020. However, excluding certain non-recurring factors such as entitlement effects, divestments, and government mandates, oil-equivalent production increased 3% for the quarter led by the Permian and Guyana. We view these two oil-producing regions as Exxon’s best growth catalysts for the future.
Exxon has about 10 billion barrels of oil equivalent in the Permian and expects to reach production of more than 1.0 million barrels per day in the area by 2025. Guyana is Exxon’s other major growth prospect. The company has nearly tripled its estimated reserves in the area, from 3.2 billion barrels in early 2018 to nearly 9.0 billion barrels.
Despite the cyclical nature of the oil and gas industry, Exxon Mobil is a reliable dividend growth stock. It is on the Dividend Aristocrats list due to its impressive dividend history. With a current yield over 6%, Exxon Mobil is an attractive pick for income investors.
High Yield Stock: Altria Group
Altria is a tobacco giant that owns the Marlboro brand in the United States. Altria dominates the industry, as Marlboro alone controls over 40% of the domestic retail market. Altria is an impressive dividend stock that has increased its dividend for 50 consecutive years, placing it on the very exclusive list of Dividend Kings.
Altria reported second quarter earnings on July 29th. Revenue increased 9% to $6.9 billion, or 11% growth after excise taxes. The core smokeable products segment generated 8% revenue growth, driven by higher prices and volume growth.
The company has diversified its business model beyond tobacco in recent years, by investing in companies in multiple adjacent businesses. For example, Altria owns 10% of beer giant Anheuser-Busch InBev (BUD). It also invested $13 billion in vaping giant Juul Labs, and it separately invested $2 billion in Canadian cannabis producer Cronos Group (CRON). These represent major areas of growth for Altria in the years ahead.
In the meantime, Altria generates huge free cash flow from its legacy tobacco business. Altria generated free cash flow of $8.15 billion in 2020, which represented over 30% of full-year revenue. It produces such strong free cash flow year after year, regardless of the economy. In this way, Altria is a recession-proof stock.
Altria operates in a highly regulated industry, which virtually eliminates the threat of new competition in the tobacco industry. Altria enjoys strong brands across its product portfolio, including the No. 1 cigarette brand. As a result, it has pricing power and brand loyalty. In addition, tobacco companies enjoy low manufacturing and distribution costs, thanks to its economies of scale.
Altria maintains a target payout ratio of 80% of its annual adjusted earnings-per-share. This keeps the dividend payout manageable for the company, while providing shareholders with a competitive payout. Shares currently yield 7.2%.
High Yield Stock: SL Green Realty
Our final pick is a lesser-known stock, but it is a strong dividend payer nonetheless. SL Green is a real estate investment trust (REIT) that is focused on acquiring, managing, and maximizing the value of Manhattan commercial properties. It is Manhattan’s largest office landlord, with a market capitalization of $5.7 billion, and currently owns 77 buildings totaling 35 million square feet.
SLG has been significantly affected by the coronavirus crisis, which has hurt several companies that are tenants of SLG. Occupancy of office space in the 10 large cities was just 24% in late March. This has caused an unprecedented tenant-friendly environment and challenges to the business of SLG but we still expect the REIT to recover from the pandemic from next year.
The company’s second-quarter results reflect the current dynamics. Its same-store net operating income decreased -2.7% over last year’s quarter and its occupancy rate decreased from 94.2% at the end of the previous quarter to 93.6%. Its funds from operations (FFO) per share decreased -6% over the prior year’s quarter, from $1.70 to $1.60, but only due to higher lease termination income in last year’s quarter.
Excluding this factor, FFO per share would have edged up 2%. During the quarter, SLG signed 42 Manhattan office leases at -1.1% lower rates compared to previous leases. The recent quarter showed lingering challenges, but at the same time, continued steady improvement from the pandemic conditions of 2020.
SLG has ample liquidity and a strong BBB credit rating. Thanks to its healthy financial position, the REIT can endure the ongoing crisis and emerge stronger when the pandemic subsides. It can also maintain its attractive 5.1% dividend, which is well-covered by a dividend payout ratio of 56%.
The Bottom Line
With the S&P at a record, dividend yields have fallen across the stock market. As a result, high-yield stocks are harder to find. Fortunately, investors can still find high-yield stocks without having to sacrifice in terms of fundamental quality. Exxon Mobil, Altria Group, and SL Green have competitive advantages, secure dividend payouts, and high yields above 5%.
