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When you’re getting paid to own a stock, as income investors like to do, throwing a bit of dash into your portfolio isn’t a bad idea. You can get the benefit of dividend income and hopefully a good bit of capital appreciation.
We asked three of The Motley Fool’s top contributors to give us a dividend-paying stock that might inject the right amount of gusto into a portfolio. Read on to see why Cedar Fair (NYSE:FUN), Gilead Sciences (NASDAQ:GILD), and McDonald’s (NYSE:MCD) could be just the ticket for a little derring-do.
Strap in and place your arms in the air
Demitri Kalogeropoulos (Cedar Fair): Cedar Fair is one of the biggest regional amusement-park operators in the country, with 11 locations spread out across the United States. The company also boasts one of the highest dividends around, with a 4.8% yield.
Investors don’t have to sacrifice growth for this solid payout, either. On the contrary, Cedar Fair has set operating records in each of the past six years and is on track to reach another high-water mark in 2017. Yes, first-quarter results in early May showed declining sales and an expanding net loss. However, the winter period accounts for less than 5% of the full-year business, given that most of its resorts are closed.
Early season bookings for passes seem strong, and management commented that guest spending is so far tracking higher for the parks that were open in Q1.
CEO Matt Ouimet and his team are targeting adjusted earnings of $500 million in 2017, up 4% over the prior year. New rides and investments likely to boost attendance this year include a wooden roller coaster in its Kings Island park in Ohio and water park expansions in its Cedar Point and Knott’s Berry Farm parks. All three of these resorts open for business in late May.
Over the longer term, the company has aggressive plans to make use of the nearly 1,500 acres of unused land that’s sitting adjacent to its parks. Capital expansion projects should help deliver increased guest spending while strengthening its competitive position.
Take the contrarian view on this biotech giant
Brian Feroldi (Gilead Sciences): “Dividend” and “biotechnology” are two words that most investors don’t associate with each other. The vast majority of biotechnology stocks barely generate any revenue, let alone profit.
However, Gilead Sciences is far from a typical biotech stock. This company is so profitable, in fact, that it returned more than $12 billion to shareholders in the form of dividends and buybacks in 2016 alone. What’s more, at current prices, the stock offers up a dividend yield of 3.2%, which is remarkable considering only 20% of its profits are used to fund the dividend.
Why is Gilead’s yield so high, given its low payout ratio? The answer lies in its valuation. Gilead is currently trading at less than 7 times trailing earnings, a notably low figure. However, it’s hard to tell if Gilead is undervalued because, despite the seeming good news for investors, its revenue and profit have been on the decline. Investors can blame the fall on declining sales of its dominant hepatitis C franchise drugs, Harvoni, Solvadi, and Epclusa. Because these drugs cure patients of hep-C, Gilead’s revenue comes to a grinding halt once a patient no longer needs treatment. So when combined with ongoing pricing pressure, Gilead is struggling to put up year-over-year growth. That’s why traders have virtually abandoned the stock.
While there’s no doubt that Gilead is in a tough spot, I see reasons to believe that taking the contrarian view is warranted. First, Gilead remains highly profitable, and it has a cash hoard of more than $32 billion at its disposal. Wall Street has been pressuring the company to buy something — anything — that could get its growth engine moving again. Any news on this front could cause shares to rally.
Second, Gilead is still pouring billions into its research-and-development program to research new drugs aimed at treating cancer, non-alcoholic steatohepatitis, and a number of other diseases. While success is never guaranteed, the company’s track record of success shouldn’t be overlooked.
Finally, Gilead’s highly profitable HIV franchise is still growing at double-digit rates, so once hep-C revenue stabilizes, its year-over-year numbers should perk up.
Gilead is far from a slam-dunk, but if you’re a daring investor looking for a good dividend stock, I think this company could be worthy of your attention.
A quick-serve investment
Rich Duprey (McDonald’s): When fast-food giant McDonald’s was stumbling over itself with repeated quarterly declines in same-restaurant sales, investors didn’t give up on the stock. Now that it seemingly has found its stride once more, why shouldn’t the burger chain continue its inexorable rise?
Shares of McDonald’s are 21% higher over the past year and have gained 35% from their 52-week lows of last October. With its all-day breakfast promotion continuing to be a net plus and a menu that once again focuses on its core customers, there’s good reason to think the Golden Arches can continue to outperform.
Despite recent improvements the company continues to be faced with opposition from minimum-wage activists and is also having trouble luring previously lost customers back to its restaurants. While it has reported higher comps, it’s been as a result of price increases and product mix; customer traffic continues to come in lower each year.
Yet everything points to continued improvement. Profits are already moving higher, with operating income jumping 14% and net income running up 8%. That bolsters its dividend of $3.76 per share, which currently yields 2.5% annually. The burger palace has raised the investor payout for 41 straight years, putting it among a rarefied crowd of dividend elites.
At 26 times earnings and 21 times next year’s estimates, this stock is not overvalued despite the gains it’s made, and analysts still expect McDonald’s to be able to grow earnings at nearly 10% annually. It’s not a cheap stock, but if you’re on the daring side, then a bet the Golden Arches can continue its streak isn’t as risky as it might sound.
Brian Feroldi owns shares of Gilead Sciences. Demitrios Kalogeropoulos owns shares of McDonald’s. Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has the following options: short June 2017 $70 calls on Gilead Sciences. The Motley Fool recommends Cedar Fair. The Motley Fool has a disclosure policy.