In the world of stock investing, there is capital appreciation and then there is income. The former is a fancier term for the growth component of an equity investment. The latter refers to the dividend payments that some companies make to shareholders.
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Wouldn’t it be great to have your cake and eat it too?
Enter dividend stocks. These investments are designed to provide the best of both worlds—regular income distributions and price appreciation.
Not all dividend stocks are created equal though. Some have low dividend yields and others have high dividend yields.
High dividend yield stocks may seem like the obvious choice, but there are caveats. Sometimes the high yield is associated with a dividend that is not sustainable or the result of a compromised financial position.
Other times, what you see is what you get—a well run company that pays a large dividend and has solid long term growth potential.
These are three high-yielding stocks that check the boxes for dividend stability and attractive growth prospects.
Does Gilead Sciences Pay a Dividend?
Gilead Sciences, Inc. (NASDAQ: GILD) develops treatments for hepatitis, HIV, and various types of cancer. Recently it has become better known as the maker of the first U.S.-approved Covid-19 treatment, remdesivir.
As a growth-oriented biopharmaceutical company, dividend isn’t the first thing to come to mind with Gilead. Yet it has paid a quarterly dividend in each of the last seven years. Even better, the dividend has been increased in each of those years.
Gilead’s $0.73 per share quarterly distribution equates to $2.92 on an annual basis. This means the stock currently has a 4.7% forward dividend which far exceeds that of the broader healthcare sector (1.6%).
And with less than half of the company’s profits being returned to shareholders as dividends, the likelihood of further increases is good. Debt comprises approximately 57% of Gilead’s capital structure which implies low financial risk. This combined with a strong revenue growth outlook stemming from additional remdesivir approvals should support cash flow and keep the generous dividends coming.
What is Dow’s Dividend Yield?
Dow, Inc.’s (NYSE: DOW) forward dividend yield of 4.5% is nearly twice that of the materials sector. The company has paid a dividend on its own every quarter since it spun off from DowDuPont in April 2019. And with a payout ratio of 42%, even more of Dow’s bottom line could eventually reach shareholders’ accounts.
With Dow, the growth part of the investment is expected to come from the broad-based strength of the business. Last month it reported that all three segments—Performance Materials & Coatings, Industrial Intermediaries & Infrastructure, and Packaging & Speciality Plastics—recorded higher sales in the fourth quarter. Better yet, sales were up across all geographies. It is this type of well-balanced growth that should give investors comfort as to the stability of the company—and the dividend.
In the near-term, Dow is expected to benefit from rising commodity prices which are translating to higher selling prices for its diverse set of chemical and materials products. Longer term the company will be a beneficiary of demand from North America and China and grow alongside these key markets. With exposure to the consumer and infrastructure markets, cash flow should remain robust for the next few years and support the lofty dividend.
Is Ethan Allen Interiors Stock a Buy?
Over in the small-cap space, Ethan Allen Interiors, Inc. (NYSE: ETD) is an underappreciated growth and income play. The home furnishings manufacturer currently offers a 4.6% forward dividend yield with its stock having retreated more than 20% off its May 2021 peak.
The pullback has presented a great buying opportunity for investors looking to decorate their portfolio with a small cap dividend name. There isn’t a consumer cyclical company in the S&P 600 that comes with a yield. Plus, less than 40% of earnings are distributed as dividends, so there is plenty of room for expansion.
Ethan Allen is building off a stellar 2021 when revenue grew 16% to $685 million. Through two quarters of the current fiscal year, sales growth has accelerated to 18% due in large part to an improving e-commerce presence.
The company is connecting well with younger shoppers who are purchasing new lines of beds, sofas, tables, and other decor to spruce up their abodes. These consumers have embraced Ethan Allen’s virtual-reality design software which lets them see how furniture will fit into their homes and apartments. Management has referred to the technology as a “game-changer” that can drive higher sales with fewer sales associates.
Concerns around supply chain risks come to mind with furniture companies but Ethan Allen is less exposed. That’s because three-fourths of its products are made in North America whereas many competitors rely heavily on Chinese and other overseas manufacturers.
With a trailing P/E ratio of 8x and 4.6% dividend yield, there may not be a small cap value stock as inviting as Ethan Allen.