The Top 3 Dividend Stocks With Sustainable 7% Yields

The Top 3 Dividend Stocks With Sustainable 7% Yields

By Bob Ciura

Income investors tend to gravitate toward high-yielding stocks, and for good reasons. With interest rates still historically low, high-yield stocks are attractive for income.

All three stocks presented on this list are among the 402 stocks with at least a 5%+ dividend yield. You can see the full list of 5%+ yielding stocks here.

These three go much further than that, as they have at least 7%+ yields. And, the dividend payouts appear to be sustainable. Their stock prices have declined this year, which has pushed their dividend yields higher.

But all three stocks generate enough cash flow to keep paying their hefty dividends.

7% Dividend Stock #1: Seagate Technology (STX)

Seagate has been a persistently-high yielding stock for several years. It is facing a number of challenges, including the sluggish PC industry, and the strong U.S. dollar. Only about 30% of Seagate’s revenue comes from the Americas. More concerning is the perceived obsolescence of hard disk drives, which is Seagate’s main business.

Seagate had a difficult year in 2016, as revenue declined 19%. Diluted earnings-per-share sunk to $ 0.82 for the year, down from $ 5.82 in 2015. In response, Seagate launched a major restructuring. It slashed costs across the business, which helped profitability recover in fiscal 2017.

Revenue declined again by 3.6% for the year, but cost cuts fueled a 590-basis point expansion in adjusted gross margin. This helped Seagate’s diluted earnings-per-share recover to $ 2.58 for fiscal 2017. Adjusted earnings-per-share were $ 4.12 for the year, along with $ 1.9 billion of operating cash flow.

Source: FY2017 Investor Presentation, page 4

Seagate’s GAAP earnings have still not recovered to its 2015 level, but the company is investing in new initiatives to fuel growth. Specifically, cloud storage is a growth catalyst for Seagate. In 2015, Seagate acquired Dot Hill Systems for $ 695 million, which gave Seagate valuation expansion in storage systems and software.

In addition, while solid-state drives are a threat, there will always be a certain level of demand for HDDs, particularly among large enterprise customers. High-capacity drives are still performing well for Seagate. Seagate is ramping up production of its 10 terabyte nearline product.

Seagate shipped 300,000 of these units last quarter. Sales of 10 TB drives has almost doubled over the past two quarters, and Seagate expects to capture a 50% market share in the 10TB and 12TB market by the end of the year.

Seagate has a high dividend yield of 7.6%, but the company generates enough cash flow to sustain the dividend. In fiscal 2017, free cash flow of $ 1.48 billion sufficiently covered dividend payments of $ 561 million. There was even enough free cash flow to repurchase $ 460 million of stock.

7% Dividend Stock #2: Vector Group (VGR)

Vector Group has a 7.4% dividend yield, and it passes along regular dividend increases. Vector is a Dividend Achiever, a group of stocks with 10+ consecutive dividend increases. You can see the entire list of all 265 Dividend Achievers here.

Vector is a unique company. It basically has two different businesses under one umbrella, real estate and tobacco, which have little to do with each other. Vector owns Liggett Group, Vector Tobacco, and New Valley. The company’s total revenue mix is 60% tobacco, and 40% real estate.

Liggett was founded all the way back in 1873.

Source: August 2017 Investor Presentation, page 7

In tobacco, Vector’s niche is discount cigarettes. Its brands include Eve, Grand Prix, Pyramid, Liggett Select and Eagle 20’s. Collectively, these brands provide Vector with a 13% market share in the discount segment.

In real estate, Vector’s New Valley business owns 70.59% of Douglas Elliman Realty, a diversified real estate company. As of June 30th, New Valley had invested approximately $ 205 million in a portfolio of 23 real estate investments. Douglas Elliman is the fourth-largest residential real estate brokerage firm in the U.S.

Source: August 2017 Investor Presentation, page

Vector has experienced steady growth over the past several years. In 2011, the company had adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $ 178 million. In the past four reported quarters, Vector had adjusted EBITDA of $ 273 million.

The best aspect of investing in Vector is its cash returns. Vector has paid uninterrupted quarterly dividends since 1995. Not only does the company pays a hefty regular dividend which currently yields 7.4%, but it also pays a 5% stock dividend each year. That results in a total yield above 12%, which is very attractive for income investors.

7% Dividend Stock #3: GameStop (GME)

Lastly, GameStop looks very attractive as a value stock, and as a dividend investment. It has a 7.5% dividend yield, and the stock trades for a dirt-cheap price-to-earnings ratio of 6.1. Such a high yield and low valuation multiple are clear indications that sentiment has turned negative. That is clearly the case for GameStop.

Investors are so bearish on the company, because there is great fear that GameStop will soon become obsolete. GameStop is a specialty retailer. It operates primarily in video game hardware and software. Video games broadly are a very healthy industry, but delivery of content is changing.

Gamers are increasingly downloading video games over the Internet, and console manufacturers like Microsoft (MSFT) and Sony (SNE) are more than eager to cut out the retail middle-man. This would be disastrous for GameStop, because video game retail is its bread-and-butter business, particularly when it comes to trade-ins, on which margins are very high.

GameStop’s plan to combat the deterioration of physical video games is to expand its business into new areas. It has done this in many ways.

Source: 2017 Annual Stockholder Meeting Presentation, page 2

First, GameStop built a Technology Brands segment, which includes more than 1,500 Simply Mac, Spring Mobile, and Cricket stores. Spring Mobile sells AT&T (T) products and wireless services, while Simply Mac sells the full line of Apple (AAPL) devices. GameStop also has a collectibles business, and its own digital gaming platform.

These new businesses are helping the company expand beyond traditional video games. By 2019, GameStop expects half of its annual operating profit will be derived from businesses outside physical gaming. There are some early signs of success that the turnaround is working. Total sales rose 3.6% over the first half of 2017.

For the full year, management expects total sales in a range of down 2%, to up 2%. Comparable sales are expected to be down 5% to flat. However, thanks to cost cuts and share repurchases, the company still expects diluted earnings-per-share of $ 3.10 to $ 3.40 for 2017, which would easily cover the $ 1.52 per-share dividend.

Final Thoughts

Stocks with high yields of 7%+ are usually sending a signal that the underlying business is facing trouble. All three stocks on this list have been sold off due to concerns about their future growth prospects. But in each case, these three companies have embarked on turnaround plans, and are making progress.

Investors should monitor these companies closely moving forward, as they should with all companies yielding 7%+. Investors want to make sure the turnarounds remain on track. But it appears these three dividends are sustainable, which will pay investors very well to be patient.

High-yield stocks have obvious appeal for income investors. But don’t forget about valuation. Our exclusive service Undervalued Aristocrats provides actionable buy and sell recommendations on some of the most undervalued dividend growth stocks around. Click here to learn more.

Disclosure: I am/we are long AAPL, STX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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