Investing in high-yield stocks allows you to put the magic of dividend reinvestment to work for you. Over the long run, a strong yield backed by solid business growth and predictable dividend increases are the stuff income investors' dreams are made of.
But high yields are a dime a dozen. The real trick is to identify which of these dividend payers are likely to stay generous over the long run.
To help you separate the stocks likely to be long-term winners from the flash-in-the-pan risk traps, we asked a few of your fellow investors to dive deeper into some of the best and worst high-yielding stocks on the market today.
You can reap strong yields now from shares of Nielsen N.V. (NYSE: NLSN), Crown Castle International (NYSE: CCI), and International Business Machines (NYSE: IBM). But beware -- our panelists are only recommending two of these three stocks.
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Connecting you to income
Brian Feroldi (Crown Castle International): A decade ago, smartphones were premium devices that only the wealthy could afford. Fast-forward to today, and prices on mass-market models have fallen so drastically that they have become ubiquitous in all parts of out society. That huge growth in smartphone usage has driven and 18-fold increase in mobile data traffic in the last five years alone. What's more, with billions of new devices set to come online in the years ahead, networking giant Cisco predicts that global mobile data traffic will grow at a compound annual rate of 47% between 2016 and 2021.
How will mobile providers be able to serve all of that new demand? With the help of Crown Castle International, which has been part of their answer to that question for years. Crown Castle leases out space on the more than 40,000 cell towers it owns across the United States to wireless providers that want to beef up their coverage without the hassle of building or maintaining more towers themselves.
Given the huge demand for cellular capacity, Crown Castle has been able to convince its customers to sign long-term lease agreements that feature built-in price escalations. When combined with the explosion in demand for mobile data, its clear why Crown Castle's revenue and profits have been soaring for years.
That growth has been wonderful news for income investors because Crown Castle is structured as a real estate investment trust (REIT). That means that it has to pass along the large majority of its profits back to shareholders in the form of dividends, which explains why this growth company currently offers a yield of 3.8%.
Crown Castle should continue to benefit from wireless carriers' need to enhance their networks. Its acquisition-enhanced fiber-optic business also looks poised to churn out meaningful profit growth. Based on all of that, I think that Crown Castle could deliver double-digit profit growth on top of its high yield. That's an opportunity that should make any income investor salivate.
An old dog with some new tricks
Chris Neiger (IBM): If you're in the market for a technology stock that pays a handsome dividend, they don't get much better than IBM. The stock boasts an impressive 3.8% yield now, and investors won't have to worry about whether the company is committed to its dividend -- it has raised it for 22 consecutive years.
Many tech investors know that IBM is in the middle of transitioning away from a focus on some of its shrinking legacy businesses, and toward more lucrative growth segments like artificial intelligence (AI) and cloud computing. Its commitment to those new revenue streams is finally starting to yield overall growth; about 24% of the company's fourth-quarter 2017 sales came from its cloud computing business. Additionally, IBM forecasts that the cognitive computing market will be worth $2 trillion by 2025, and it continues to expand its Watson AI services and partnerships in order to tap into it.
IBM broke its streak of 22 consecutive quarters of revenue declines in its recently reported Q4 -- a promising sign that the tech giant is on the right track. The good news for investors is that its multi-year period of lackluster performance has left its shares priced at just 11 times forward earnings -- far below the tech industry's average.
Investors looking for a high-yield tech stock with a business that's tied to growing trends like AI and cloud computing would be wise to give IBM a close look. To make its shares even enticing, IBM typically increases its dividend in April, so there may soon be even more of an incentive to hold them.
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Image source: Getty Images.
Stay away from this incredible dividend yield
Anders Bylund (Nielsen N.V.): Big dividend yields are not synonymous with great investments. Sometimes, those juicy percentages serve better as red flags to point out structural problems in the dividend-paying company.
"Incredible," in such cases, can mean exactly what it sounds like -- the opposite of "credible."
That's the case with Nielsen Holdings. The retail and media measurement veteran currently offers a fantastic 4.1% dividend yield, and the quarterly checks have grown 70% larger over the last four years.
But don't pop the bubbly to celebrate a great dividend idea just yet.
Over the same period, Nielsen's share prices sank 28%. That, more than anything else, is the driver of its impressive yields.
Top-line growth has stalled in the last three years. Over the same period, cash flows and EBITDA profits were unpredictable at best. The company misses Wall Street's earnings targets more often than not, and the difference between forecast and reality tends to be large.
This is a business in free fall. Nielsen's traditional role as a global tracker of TV and radio audiences is being disrupted by streaming media platforms with built-in audience measurement capabilities. The company is bending over backwards to stay relevant in this new era, and now offers viewership measurements for online video services such as Hulu and Facebook.
Nielsen might get lucky and find a new path to sustained growth and profits in this all-digital media environment, but that's a gamble. This is not a dividend stock I could stuff under my pillow and sleep tight on for several decades. Unfortunately, its high yield is attached to some nightmarish long-term business trends.
Anders Bylund owns shares of IBM. Once upon a time, he worked for Nielsen. Brian Feroldi owns shares of Facebook and has the following options: short January 2019 $185 puts on IBM, short January 2019 $180 puts on IBM, long January 2020 $170 calls on IBM, and short January 2020 $170 puts on IBM. Chris Neiger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Crown Castle International and Facebook. The Motley Fool is short shares of IBM. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.
