Stocks that pay large dividends aren’t necessarily the best bets for investors over the long term. A high yield can be a sign that an underlying business is no longer stable and investors are expecting a dividend cut in the future.
However, some high dividend yields are the result of the market not appreciating a stock’s long-term cash flow potential. Here, three Motley Fool contributors identify their favorite high-yield stocks…
Time to add this telecom to your portfolio
Todd Campbell (AT&T): It’s not a flashy stock, but its dividend yield is so enticing that AT&T ought to be in every income investor’s portfolio at this point.
Granted, the market’s moved miles away from the landline phones that turned it into a household name. But connectivity remains key to empowering the next generation of smartphones, tablets, and electronics, and AT&T is still a critical company in that arena.
Its network enables millions to communicate (or simply surf) effortlessly and the approaching rollout of 5G, a faster network, should offer plenty of tailwinds to revenue-friendly data demand.
Admittedly, competition in wireless is fierce, but AT&T’s also taken steps to diversify its revenue. In addition to its bread and butter, it’s acquired DirecTV and Time Warner, giving it important access to consumers’ growing appetite for entertainment. The Time Warner deal alone netted it HBO, a powerhouse with the highly popular Game of Thrones.
Last year, AT&T produced a staggering $43 billion in operating cash and $22 billion in free cash. This year, free cash flow could increase another 16%, giving it plenty of dividend-friendly financial flexibility. With multiple levers to fuel dividend increases and a stately 6.3% yield, AT&T is arguably a bargain worth buying.
A hated stock approaching a cyclical bottom
Leo Sun (Western Digital): Western Digital lost about 40% of its value over the past 12 months as sales of its traditional hard disk drives dried up with sluggish PC sales and weak enterprise demand, and sales of its flash-based products were hit by tumbling NAND prices.
But after that sell-off, WD trades at just 12 times forward earnings and pays a forward dividend yield of nearly 4%. Furthermore, there are strong indications that…
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