3 Great Stocks Yielding Over 5% Dividends

Includes: HCP, O, T
by: Investing Sidekick

AT&T is yielding 5.4% due to recent weakness in operating results. However, its strong dividend history and cash flows mean this dividend isn't under threat.

HCP is a REIT with a dividend yield of 5.8%, at 3-year highs, due to short-term challenges with a client. Long term, this company offers a stable dividend.

Realty Income yields 5.0% and has a perfect 15-year history of increasing dividends. Its cash flows cover dividends comfortably.

According to Bloomberg, there are currently only 11 stocks in the S&P 500 yielding over 5% in dividends; Realty Income Corp. (NYSE:O), Southern Company (NYSE:SO), CenterPoint Energy (NYSE:CNP), AT&T (NYSE:T), Iron Mountain (NYSE:IRM), HCP, Inc. (NYSE:HCP), Mattel (NASDAQ:MAT), ONEOK (NYSE:OKE), CenturyLink (NYSE:CTL), Frontier Communications (NASDAQ:FTR), and Noble Corporation (NYSE:NE). In these times of record low interest rates, it is perhaps unsurprising that these stocks aren't without their issues; companies don't trade at such dividend yields unless the market is pessimistic about their prospects. But here are 3 stocks that I think the market may be judging too harshly

AT&T (View full Stock Report)

Most readers are probably familiar with AT&T, the telecom giant that has been falling out of favour with the market due to its mature industry and increasing competition. But, before I go into the risks, let's first look at the dividend history of AT&T.

Source: Investing Sidekick Dividend Report

Dividend Yield: AT&T currently trades at a dividend yield of 5.4%, and whilst it has traded at dividend yields above this in the past, its yield hasn't been this high for the last few years.

Dividend Growth: AT&T is one of the most reliable dividend payers around, raising its dividend in 14 of the last 15 years. While dividend growth has slowed in the last 5 years compared to the early 2000s, it has still managed to grow at an average of 2.3% per year.

Dividend Coverage: Being a mature company, AT&T has very stable cash flows, and its free cash flow has covered its dividend in 13 of the last 15 years. Cumulative dividend coverage over the last 5 years has been 147%, giving the company plenty of headroom.

Debt Load: One thing I check before investing in a company is its debt, and this is one area AT&T is weaker. Its net debt stands at 3x EBITDA which is modest, but interest coverage is only 3.4. However, given AT&T's stable revenue stream and reliable FCF, its debt load is manageable and shouldn't in itself be a problem.

Cash Flow Generation: I have mentioned cash flow numerous times, as at the end of the day a company is only worth the cash it generates. AT&T is a strong cash generative business, with its net income actually understating the amount of free cash flow it generates. The chart below reconciles operating income to free cash flow and this is broadly consistent over 5, 10 and 15 years.

Source: Investing Sidekick Cash Flow Report

Risks: Recent operating performance of the business has been weak as a price war intensifies in the telecom industry, as you can see from the quarterly operating profit per share results below:

Source: Investing Sidekick Operating Report

The company is no stranger to operating issues, however, you will notice that operating profits also declined in 2012 before rebounding. AT&T still has growing revenues, and its gross margins have been improving over the last few years. This gives me confidence that operating results can improve.

HCP, Inc. (View full Stock Report)

HCP is a REIT that invests in healthcare-related properties. As with most REITs, it has a very stable cash flow stream and hence very stable dividends.

Source: Investing Sidekick Dividend Report

Dividend Yield: HCP is currently trading at a dividend yield of 5.8% and hasn't traded at this high a yield since 2012, when the share price subsequently rallied and the dividend yield fell back to hit a low of 4.5%

Dividend Growth: HCP has a strong history of dividends, increasing them every year in the last 15 years. Over the last 5 years, dividends have increased at an average of 3.5% per year, and over the last 15 years, dividends have grown at 3.0% compounded per year.

Dividend Coverage: Whilst HCP's cash flows are sufficiently lumpy, that cash flow has only covered dividend payments in 11 of the last 15 years; its cumulative dividend coverage over the last 5 years is 120%, giving it sufficient headroom.

Cash Flow Generation: As we would expect from a REIT, cash flow is very stable, and are much greater than net income would suggest due to depreciation charges. CF has been roughly identical to the company's operating profit over the last 10 years.

Source: Investing Sidekick Cash Flow Report

Risks: Last quarter, HCP posted an operating loss after one of its biggest clients ran into problems with the Department of Justice.

Source: Investing Sidekick Operating Report

I won't go into these issues in detail as these have been covered previously in this article. Although operating profits could continue to suffer because of these issues, and in the short term, the dividend is under threat, in the medium-to-longer term, HCP owns quality real estate which can be rented out to alternate operators and rental payments will recommence.

Realty Income Corp. (View full Stock Report)

As the name suggests, this is another REIT, but that focuses on commercial property.

Source: Investing Sidekick Dividend Report

Dividend Yield: Realty Income currently yields 5.0%, and whilst this isn't the highest yield it has traded at over the last few years, it is above average.

Dividend Growth: Dividends have increased in 15 of the last 15 years, and have grown at 5% compounded per year over the last 5 and 10 years.

Dividend Coverage: Whilst dividend coverage is lower for Realty Income than the previous two stocks, it is still comfortable at 115% over the last 5 years. The dividends have been covered by cash flow in 11 of the last 15 years.

Cash Flow Generation: Realty Income is a strong cash flow generator, with both net income and operating profit greatly understating the amount of cash this business generates. CF has been roughly double reported operating income in the last 5 and 10 years.

Source: Investing Sidekick Cash Flow Report

Risks: The biggest risk to this REIT is interest rates rising and the shares being re-rated as a consequence. This isn't a risk unique to Realty Income however, and affects all dividend-paying stocks.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.