The S&P 500 Index is yielding a paltry 1.26% at the moment, making it difficult for investors needing high levels of income to simply jump into the index. From this average, it's also clear that the majority of S&P 500 stocks don't offer decend dividends at the moment.
In general, investors should avoid reaching for dividend yields that are too high above the market average, since it can be disastrous if these dividends were to be cut. That's why it's important to take a closer look at high-yielding stocks to see if they are able to support their dividends in the long term.
Fortunately, there are still some stocks with yields that are twice that of the S&P 500 and appear to be well-covered. Even better, some of these stocks trade near or below their long-term respective average valuations and GuruFocus Values.
Prudential Financial
Up first is Prudential Financial, Inc. (PRU, Financial), with provides financial products such as life insurance, investment management, annuities and retirement-related services. With $1.7 trillion in assets under management, Prudential has a massive size and scale that is largely unmatched by the majority of its peers. The nearly $39 billion company generated revenue of $54.8 billion in 2020.
Prudential cut its dividend by nearly 50% in 2008 as the company dealt with the challenges of the financial crisis. However, the company did start growing the dividend the very next year. By 2010, the dividend matched the pre-cut amount.
Following a 4.5% increase for the March 11, 2021 payment, Prudential’s dividend growth streak now stands at 13 years. The dividend has a compound annual growth rate (CAGR) of 13.2% over the past decade, so the most recent increase is on the low side.
That said, Prudential has a very safe payout ratio. Shareholders received a total of $4.60 of dividends per share in 2021. Wall Street analysts expect that the company will earn $13.96 per share this year, resulting in a low projected payout ratio of 33%. This isn’t too far off of the 10-year average payout ratio of 28%.
Shares of the company yield 4.3%, or more than three times the average yield of the S&P 500 Index. According to Value Line, Prudential has an average yield of 3.4% over the last decade. Removing last year’s unusually high yield due to the recession's impact on the stock price, the long-term average yield drops to 3%.
Prudential closed the most recent trading session at $106.91. Using earnings estimates for the year, the stock has a forward price-earnings ratio of 7.7. For context, the stock has averaged a price-earnings ratio of 8.2 over the last 10 years, so shares are trading lower than they usually do.
The GuruFocus Value chart shows the stock to be slightly ahead of its GF Value.
With a GF Value of $98.24, Prudential has a price-to-GF-Value ratio of 1.09. Shares would retreat more than 8% if they were to return to their GF Value. Prudential is rated as fairly valued by GuruFocus.
Sonoco Products
Next is Sonoco Products Company (SON, Financial), which supplies packaging and industrial products to clients. The company’s products are used in a variety of end-markets, including appliances, electronics, food and beverage. The company has a market capitalization of $5.4 billion and generated more than $5 billion of revenue last year.
Sonoco Products has a strong dividend growth history. The 4.7% increase for the March 10, 2021 payment extended the company’s dividend growth streak to 38 years. This is extremely close to the dividend’s 10-year CAGR of 4.6%.
The company’s dividend has been tested by several recessions, including the Great Recession. Sonoco Products’ dividend growth slowed slightly in 2009, but, overall, it grew nearly 6% during the 2007 to 2009 time period. Growth accelerated following this period.
The company distributed $1.80 of dividends per share in 2021. With analysts predicting earnings per share of $3.59 for the year, the implied payout ratio is 50%. Sonoco Products has an incredibly consistent payout ratio over the last 10 years, ranging from a low of 48% to a high of 55%. The expected payout ratio for this year is just below the average of 52% since 2011.
Sonoco Products yields 3.2% at the moment, which matches its long-term average yield exactly.
The stock closed Wednesday’s trading session at $55.34, resulting in a forward price-earnings ratio of 15.4. The last decade has seen shares trade with an average multiple of 16.3 times earnings.
The GuruFocus Value chart indicates the stock is trading at an even steeper discount to its intrinsic value.
The GF Value is estimated to be $62.13, giving the stock a price-to-GF-Value ratio of 0.89. Sonoco Products would provide a return of more than 12% if it were to reach its GF Value. Add in the dividend and total returns could stretch into the mid-teens. The stock is rated as moderately undervalued.
STORE Capital
The final name here is STORE Capital Corporation (STOR, Financial), which focuses on acquiring and managing single-tenant real estate properties in the U.S. The real estate investment trust was founded in 2011 and had its initial public offering in 2014. STORE Capital is valued at $8.9 billion and has annual revenue of $694 million.
The trust raised its dividend 6.9% for the Oct. 15, 2021 payment, giving STORE Capital a growth streak of eight years. STORE Capital has raised its dividend with a CAGR of almost 5% over the past five years, so the recent increase is higher than shareholders are accustomed to.
STORE Capital paid out $1.49 of dividends per share this year. The trust is expected to produce funds-from-operation of $1.87 in 2021, leading to a projected payout ratio that is slightly less than 80%. The payout ratio is high, but not unheard of for a REIT. The five-year average payout ratio is 71, so this year’s figure is above the medium-term average.
STORE Capital wasn’t in business when the last recession took place, so it isn’t entirely possible to determine how the trust would have dealt with that time period. The payout ratio does look reasonable compared to its historical average.
As with most REITs, STORE Capital pays an attractive dividend yield. At the moment, the yield is 4.6%, nearly four times the average yield of the S&P 500 Index. The current yield is above the five-year average yield of 4.3% as well.
STORE Capital closed yesterday’s trading session at $33.87, giving the stock a forward price-to-funds-from-operation ratio of 18.1. The stock has traded at almost 17 times funds-from-operation over the last half-decade, but STORE Capital’s forward valuation is more in-line with the average seen the last two years.
The GuruFocus Value chart says the stock is trading close to its intrinsic value.
STORE Capital has a GF Value of $34.53, giving shares a price-to-GF-Value ratio of 0.98. The stock could see a 1.9% gain from current levels. Factor in the dividend yield and total returns could be in the mid-single-digits. The stock is rated as fairly valued.
Final thoughts
Prudential, Sonoco and STORE Capital all trade with at least twice the yield of the S&P 500 Index. All three stocks also match or exceed their average yields and, in each case, the dividend looks to be safe. Sonoco Products is the only name to trade below the long-term average valuation and GF Value, but Prudential and STORE Capital don’t appear to be greatly overvalued by either measure. This suggests that all three names could be attractive to investors looking for safe income from reasonably valued stocks.
