Interest rates are moving higher yet remain historically low.
Persistent inflation and Fed action pushed the 10-year Treasury note yield above 3% earlier this month before it settled back down to the current 2.8%. Going way back to 1912, the benchmark 10-year has averaged just over 5%.
There are still ways to get that 5%.
With government and corporate yields inching up, bonds are becoming more attractive to some investors. Their relative safety in a rocky equity market combined with more attractive yields is a tempting value proposition.
An alternative approach is to invest in roughed-up equities that come with juicy dividend yields. While some high-yielding stocks are better left untouched because of their dividend instability, others are ripe for the picking.
These three stocks offer the best of both worlds—dividend yields that are roughly twice that of the 10-year and have long-term capital appreciation potential to boot.
What is a Good Energy Stock?
Up sharply since late-2021, Devon Energy Corporation (NYSE:DVN) has some serious momentum on its side. It’s not too late to hop on the bandwagon nor is it too late to benefit from a generous dividend.
The oil & gas producer currently offers a $1.27 quarterly dividend that has been increased in each of the last five years. This equates to a 7.2% annualized dividend yield that well exceeds the 4.2% average yield of the energy sector. And with a forward payout ratio of 61%, there is still room to bump the dividend even higher.
Based on the cash flow Devon Energy is generating these days, further dividend hikes are plausible. Its onshore U.S. and Canadian operations cranked out more than $1.2 billion in profits in the first quarter amid sharply higher crude and natural gas prices. The company is also benefiting from synergies derived from its acquisition of WPX Energy.
It remains to be seen how long energy prices remain elevated. What is certain is that Devon Energy owns some of the strongest assets in the industry and incurs relatively low extraction costs. Long-term global energy demand should keep the dividends gushing and the stock price flowing upstream.
Is There a Public Investment Vehicle for Private Equity?
Blackstone Inc. (NYSE:BX) offers unique exposure to alternative investments in addition to an above-market yield. With much of the company’s earnings derived from real estate, this is a REIT-like investment that distributes over 80% of profits as dividends. The annualized forward dividend of $5.28 means Blackstone currently offers a yield of approximately 5%.
In addition to a range of property types, Blackstone invests in private equity, hedge funds, credit assets, and closed-end mutual funds. It is on a quest to grow the fee-earning portion of its assets under management (AUM) which is translating to some stellar financial results.
First-quarter distributable earnings of $1.55 were up 61% year-over-year and crushed the analyst consensus by $0.48. Fee-related earnings increased 55% as Blackstone’s AUM jumped to $916 billion and within striking distance of management’s year-end goal of $1 trillion. The recent downturn in the capital markets has likely set the company back, but the target still appears attainable.
Despite its exposure to risk assets, Blackstone has a substantial cash cushion. It sits on $139 billion in untapped funds which can be used to purchase attractively discounted assets amid the recent market pullback.
Blackstone shares themselves have also been corrected of late. Trading 28% below their record peak, they presently offer a nice mix of growth and income.
Is IBM a Growth & Income Stock?
International Business Machines Corporation (NYSE:IBM) may not be the cutting-edge technology company it once was, but it does still provide exposure to growing areas of tech—and a 5% forward dividend yield.
“Big Blue” has raised its dividend for 28 consecutive years. As more of an infrastructure consulting services provider than a hardware manufacturer these days, IBM has shifted its attention away from desktops and toward the faster-growing cloud computing and artificial intelligence markets. The move bodes well for margins and the ability to continue returning more than 60% of profits to shareholders in the form of dividends.
After spinning off the Kyndryl businesses, approximately 70% of IBM’s revenue comes from higher growth segments. As a result, margins are on the rise. In Q1 revenue exceeded the Street’s forecast and the pre-tax margin expanded 230 basis points to 12.4%.
IBM believes it can sustain single-digit top-line growth and continue to improve margins as it leans more on the cloud and AI. This should support its ability to extend its dividend hike streak for years to come.
As Big Blue reinvents itself, investors have the potential to earn some big green from both price appreciation and dividends.