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3 High-Yield Stocks at Rock-Bottom Prices

The market has been battered this year by concerns about trade tensions, tariffs, rising interest rates, and the flattening yield curve in the bond market. The sell-off has reduced some solid dividend stocks’ prices and valuations while boosting their yields.

Today, a trio of fool.com contributors will highlight three stocks that fit that bill: General Mills(NYSE:GIS)Verizon (NYSE:VZ), and Kinder Morgan (NYSE:KMI).

A packaged foods giant

Leo Sun (General Mills): General Mills pays a forward dividend yield of 4.5%, and it’s raised that payout annually for 14 consecutive years. It spent just 54% of its earnings and 51% of its free cash flow (FCF) on its dividend over the past 12 months, so it has plenty of room for future hikes. The company also grew its FCF 28% annually last year, and it returned $1.7 billion to its shareholders via dividends and buybacks.

General Mills’ massive portfolio of packaged foods includes well-known brands like Cheerios, Haagen-Dazs, and Betty Crocker. The company also acquired seemingly healthier brands — like organic-food maker Annie’s and natural snack brand Epic Provisions — to attract health-conscious consumers. It also recently acquired premium pet-food maker Blue Buffalo Pet Products as part of that expansion into adjacent markets.

General Mills expects its organic sales to be flat to up 1% for the year, for its net sales (mostly boosted by Blue Buffalo) to rise 9% to 10%, and for its adjusted earnings per share to be flat to down 3% on a constant currency basis. Those growth rates might seem unimpressive, but the stock is cheap at 12 times forward earnings.

General Mills is also a “recession-resistant” stock that tends to fare better during economic downturns. Therefore, General Mills’ high yield, low valuation, and wide moat make it an ideal income play for a tumultuous market.

The right call for dividend investors

Dan Caplinger (Verizon Communications): Telecommunications stocks have struggled to make much ground over the past five years, as intense competition among major players has offset the massive growth opportunities from demand for broadband internet service. Even industry giant Verizon Communications has run into obstacles, with lower-priced rival services seeking to undercut the premium provider’s pricing power through a brutal price war.

Yet Verizon has stuck with its usual strategy of emphasizing quality, seeking to become the first network to offer universal access to 5G network capabilities. By holding out the promise of a superior network, Verizon hopes that first-mover customers — who are also most likely to stick with the provider regardless of when competitors catch up — will be willing to pay prices above what they can pay for inferior service elsewhere.

Despite the costs involved with the 5G buildout, Verizon hasn’t done anything to endanger its lucrative dividend. The stock sports a yield of more than 4% currently, and the company has built a reputation for modest yet consistent dividend growth, notching 14 straight years of annual increases to its payout. Even though the telecom industry will remain competitive well into the future, Verizon isn’t letting those pressures change what has been a successful approach to its business. Shareholders should continue to reap the rewards from that strategy, including the lucrative dividend payments Verizon is well-known for making.

A chance to lock in a big-time yield for a dirt-cheap price

Matt DiLallo (Kinder Morgan): Shares of natural gas pipeline giant Kinder Morgan currently yield 4.7%, which is well above average. One reason the yield is so high is that its shares are dirt-cheap. With the stock recently selling for around $17 per share, and the company on pace to generate at least $2.05 per share in cash flow this year, it implies that Kinder Morgan sells for about eight times cash flow. That’s a rock-bottom price for a pipeline stock since the average one trades for roughly 10 times cash flow.

That bottom-of-the-barrel valuation doesn’t make much sense. For starters, Kinder Morgan has significantly improved its financial profile over the past few years and now has a rock-solid balance sheet. At the same time, the company’s growth prospects are much clearer after it jettisoned a controversial oil pipeline expansion in Canada while securing several gas pipelines projects in the U.S.

Those new gas pipelines alone have the company on pace to grow earnings 11% in the next couple of years. That earnings growth, when combined with Kinder Morgan’s balance sheet improvements, should give the company the fuel to increase its high-yielding dividend by 25% in both 2019 and 2020. Given where shares trade these days, that implies a more-than-7% yield for 2020.

With the market significantly undervaluing Kinder Morgan’s stock for no apparent reason, income-seeking investors can pick up its high-yielding and fast-growing dividend for a bargain-basement price. That should enable them to earn strong total returns in the coming years.

source: fool.com

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