Photo by Chris Liverani on Unsplash
 

Income-oriented investors have been facing an adverse investing environment since early last year. The surge of inflation has triggered a bear market while it is also eroding the real value of investment portfolios. High-dividend stocks are great candidates for the portfolios of income-oriented investors, as these stocks may help offset the eroding effect of inflation. In this article, we will discuss the prospects of three high-yield stocks, which are offering dividend yields above 5% and are attractively valued right now, namely Walgreens Boots Alliance (WBA), AT&T (T), and M.D.C. Holdings (MDC).
 

Walgreens Boots Alliance

Walgreens Boots Alliance is the largest retail pharmacy in both the U.S. and Europe. Through its flagship Walgreens business and other business ventures, the company is present in more than 9 countries, with more than 13,000 stores in the U.S., Europe, and Latin America.

Walgreens has an immense network, which results in great economies of scale. In addition, thanks to the essential nature of its business, the company has proved resilient to recessions. Even during rough economic periods, people do not curtail their health expenses. Given the recent economic slowdown, which has resulted from the aggressive interest rate hikes implemented by the Fed, the resilience of Walgreens to economic downturns is particularly important.

On the other hand, Walgreens is currently facing some headwinds. First of all, the company has failed to grow its earnings per share over the last four years, primarily due to heating competition, which has resulted in thin operating margins. Moreover, the profit margins in the pharmaceutical industry have become an object under scrutiny in recent years. As a result, Walgreens is unlikely to enhance its operating margins in the upcoming years.

Walgreens is also facing another headwind, namely the fading positive effect of the pandemic. In its fiscal second quarter, the company executed only 2.4 million vaccinations, which was 80% lower than the 11.8 million vaccinations in the prior year’s quarter. As a result, the earnings per share of Walgreens plunged 27% over the prior year’s quarter. It is also worth noting that Walgreens attempted to sell its Boots business but it failed to receive an attractive offer and thus it eventually decided to retain this business.

All these headwinds have caused Walgreens to underperform the broad market dramatically. During the last five years, the stock has slumped 43% whereas the S&P 500 has rallied 57%. Such a vast underperformance is rare for this defensive stock.

On the bright side, Walgreens has become remarkably cheap. The stock is currently trading at a nearly 10-year low price-to-earnings ratio of 7.9, which is much lower than the 10-year average of 14.3 of the stock. In addition, Walgreens has raised its dividend for 47 consecutive years and is now offering a nearly 10-year high dividend yield of 5.4%. Given its healthy payout ratio of 42% and its defensive business model, the company is likely to continue raising its dividend for many more years, albeit at a slow pace. Overall, Walgreens is exceptionally attractive for patient investors, who can remain focused on the long run during the ongoing downturn of the company.
 

AT&T

AT&T is a global leader in telecommunications, with more than 100 million customers. About a year ago, AT&T completed the spin-off of WarnerMedia.

AT&T is a colossal business, which generates annual revenues of approximately $120 billion. However, the company has grown its earnings per share by only 0.3% per year on average over the last decade. As a result, the stock has dramatically underperformed the broad market over the last decade, shedding 33% whereas the S&P 500 has rallied 159%.

The poor performance of AT&T has been caused primarily by some poor investing decisions. AT&T acquired DirecTV for $65 billion in 2015, near the peak of the business of the cable television company. After having lost about 10 million subscribers, AT&T spun off DirecTV, with an implied enterprise value of only $16.25 billion. A similar situation was evidenced with Time Warner, which AT&T acquired five years ago but spun off last year. In both situations, AT&T bought other companies at high prices and then sold them at much lower prices, thus reducing shareholder value.

Fortunately, the worse seems to be behind AT&T. Thanks to the aforementioned divestments, the company has become a leaner company, which has become laser-focused on its core business. AT&T has exhibited solid business momentum in the last few quarters thanks to strong customer additions across its growing 5G wireless and fiber networks. The company is investing in the expansion of its 5G and fiber networks at a record pace. AT&T posted 280,000 fiber net additions in the most recent quarter and thus it has posted more than 200,000 additions per quarter for 12 consecutive quarters. It is also remarkable that the company has exceeded the analysts’ earnings-per-share estimates for 9 consecutive quarters.

AT&T cut its dividend after the spin-off of WarnerMedia, as the new company is much smaller than the old one. Nevertheless, the stock is still offering an attractive dividend. It is offering a 5.7% dividend yield, with a solid payout ratio of 44%, and is trading at a nearly 10-year low price-to-earnings ratio of 8.0. As the company seems to have returned to growth mode, it is likely to highly reward investors in the upcoming years.
 

M.D.C. Holdings

M.D.C. Holdings has two primary operations, homebuilding, and financial services. Its homebuilding division purchases finished lots or develop lots to the extent necessary for the construction and sale of single-family detached homes to homebuyers under the name “Richmond American Homes.” Its financial services division issues mortgage loans primarily for the homebuyers of the company while it also sells insurance coverage.

M.D.C. Holdings greatly benefited from the coronavirus crisis. Thanks to the nature of this crisis and the unprecedented fiscal stimulus packages offered by the government, the demand for new houses skyrocketed. As a result, M.D.C. Holdings posted record earnings per share in 2021 and the second-best earnings per share in its history in 2022.

Moreover, the stock is currently trading at a price-to-earnings ratio of only 10.9 and is offering a nearly 10-year high dividend yield of 5.2%, with a decent payout ratio of 57%. Furthermore, the company has a rock-solid balance sheet and thus it pays negligible interest expense. As a result, its dividend seems to be safe in the absence of a severe recession.

On the other hand, the business of M.D.C. Holdings has decelerated this year due to the fading tailwind from the pandemic. Investors should also be aware that the demand for new homes greatly decreases during adverse economic periods and hence M.D.C. Holdings is highly vulnerable to recessions. In the Great Recession, the quarterly sales of M.D.C. Holdings plunged 99% within just a few quarters and the company incurred excessive losses. This is an important risk factor to consider, particularly given the latest economic slowdown. Overall, M.D.C. Holdings is attractively valued right now but investors should be aware of the material downside risk of the stock in the event of a deep recession.
 

Final Thoughts

The above three stocks are offering high dividend yields with a material margin of safety. Walgreens and AT&T seem exceptionally attractive now, as their stocks seem to have been punished to the extreme due to some business headwinds. The dividends of both stocks have a wide margin of safety and hence the stocks are attractive candidates for the portfolios of income-oriented investors.

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