Interest rates have crept up over the past couple of years, but generally still remain well below historical averages. This has caused plenty of income-seeing investors to take on more risk and buy high-yield stocks over the past decade, hunting for as much yield as they can find. This resulted in sending many top dividend stocks much higher, pushing their yields down as a result -- and leaving dividend investors with fewer reasonably valued stocks to buy.
But that doesn't mean there isn't opportunity to buy high-yield shares today. To the contrary: There are plenty of high-quality dividend-paying stocks to be found, for investors who know where to look. To help you get started, we asked three of our Motley Fool contributors to find a stock with both an above-average yield and a rock-bottom price.
They came back with two stocks that look like great value after recent market sell-offs in Broadcom (NASDAQ: AVGO) and China Mobile(NYSE: CHL), and one severely beaten-down energy stock that looks like an excellent risk-reward investment in Core Laboratories (NYSE: CLB). All three yield above 3.7% at recent prices, giving investors a solid head start on potential market-beating total returns.
Man with contemplative expression standing in front of a chalkboard with scales drawn on it.
Risk/reward or value? One of three high-yield stocks has what you're looking for. Image source: Getty Images.
Read on to learn why our experts picked these three stocks.
Collect this dividend while you wait for a recovery
Steve Symington (Broadcom): Shares of Broadcom have been thumped over the past few months, trading around 14% below their April highs and at 12.6 times this year's expected earnings. They were most recently hurt as the semiconductor giant told investors earlier this month to abandon hope for a second-half rebound. The company says the fault lies in the combination of escalating trade tensions between China and the U.S. and, consequently, broader macroeconomic uncertainty reducing visibility for its global OEM customers.
As such, Broadcom lowered its guidance to call for full-year 2019 revenue of $22.5 billion (down about $2 billion from its previous target), and for adjusted net income of $9.35 billion (or $22.15 per share), down from $23.87 before.
But there were still bright spots in its report. Demand for Broadcom's enterprise and mainframe software was solid, free cash flow soared 20% to a company-record $2.5 billion, and the company has pledged to repurchase and retire $8 billion in shares this fiscal year. Couple this with its $2.65-per-share quarterly dividend that now yields around 3.7%, and I think the stock is a great bet for patient investors willing to buy now and wait for Broadcom's eventual recovery.
China's biggest telco
Leo Sun (China Mobile): China Mobile, the largest wireless carrier in China, serves over 930 million mobile customers and more than 170 million wireline customers. The telco and its two rivals, China Telecom and China Unicom, are all state-backed enterprises.
All three telcos struggled with three major headwinds over the past year. First, smartphone sales in China tumbled 14% in 2018, according to Canalys, due to longer upgrade cycles and market saturation.
Second, Chinese regulators forced all three telcos to cut their wireless fees, eliminate data roaming charges, and provide faster wireline connections to increase the country's internet penetration rate as it rolled out 5G upgrades. And third, those upgrades caused the telcos' expenses to rise.
The escalating trade war and the Federal Communications Commission's decision to block China Mobile's long-delayed bid to enter the U.S. market kept investors away. All those headwinds caused China Mobile to lose more than 10% of its value over the past three months.
But looking closer at China Mobile's core business, things aren't that bleak. Its operating revenue rose 2% last year, and its net profit (buoyed by the IPO of China Tower last year) grew 3%. Its semiannual dividend, which is calculated based on a payout ratio of about 50%, currently tops a 4% yield.
The stock also looks cheap at just 10 times earnings -- compared with China Telecom's and China Unicom's P/E ratios of 16 and 14, respectively. China Mobile probably isn't the ideal income stock for conservative investors, but any positive news about China could light a fire under it.
What Steve said (but a little different)
Jason Hall (Core Laboratories): Like Broadcom, Core Labs is also experiencing a sectorwide downturn caused by things completely out of its control. Also like Broadcom, it's a high-quality company with some very real competitive advantages that should pay off for investors willing to ride out what has proven to be a painful period.
That's where the similarities end. The bottom line is, Core, which provides important oil and gas reservoir analysis services for producers, is in the midst of one of the most stubbornly long downturns in spending for its services we've seen in decades. As a result, the share price has lost almost 70% of its value over the past five years, and for the past few months has traded at its lowest levels since the global financial crisis a decade ago:
Core's share price has fallen so far that it's pushed the dividend into high-yield territory, 4.2% at recent prices and well above the company's historical yield:
There's some risk Core may be forced to reduce the payout if its results don't improve. Over the past year, its dividend has exceeded earnings, and when a company's payout ratio gets above 100%, it can be difficult to maintain it.
However, that's a last-resort move by management. On the first-quarter earnings call, CEO David Demshur said management had no plans to cut the dividend, and pointed out that free cash flow was higher than the dividend the past two quarters.
Let's be clear: This isn't a risk-free investment, and the dividend isn't 100% in the clear. But Core is a unique tech-focused business in oil and gas that's built to generate free cash flow and return much of it back to investors. If you're willing to take on a little more risk, now is an excellent time to buy the stock and then sit on your hands the next few years.
Jason Hall owns shares of Core Laboratories. Leo Sun owns shares of China Mobile. Steve Symington has no position in any of the stocks mentioned. The Motley Fool recommends Broadcom Ltd and Core Laboratories. The Motley Fool has a disclosure policy.
