After this year’s rush—driven by recession fears—to buy safe, income producing stocks, there aren’t many attractive high-yielding opportunities available right now in the market. But one segment is always open if you need to lock-in higher yields to boost your retirement income.
Companies that are in the middle of a turnaround usually fall into this category. This portion of the market, no doubt, offers enticing yields, but it’s also riskier. In a typical turnaround situation, companies try to cut their massive debt, or they’re dealing with a situation where disruptors are endangering their market share.
For investors interested in trying their luck in this area of the market, here are our top three picks to consider:
1. Ford Motor Co.
One of America’s largest carmakers—Ford Motor Company (NYSE:F)—has become attractive to yield-seeking investors. Its stock, trading at $8.90 at yesterday's close, is offering a dividend yield of 6.6%. This is a massive premium when you compare it with the average S&P 500 yield of just 1.9%.
The past few years have been tough for Ford. After many years of rising sales, helped by the robust global economy and consumer demand, the car maker is now facing powerful headwinds: it's undertaking an $11 billion restructuring, after its net income fell by more than half last year as demand for its sedan cars slowed. The turnaround will involve cutting thousands of salaried jobs, closing factories overseas, and building capacity to manufacture electric and driverless cars.
As Ford undertakes this massive restructuring in order to improve profitability and get ready for this new era, its stock is likely to remain under pressure. Shares have traded below $10 since mid-July amid concerns about the sustainability of its generous $0.15-a-share quarterly dividend.
Analysts have built in a potential scenario where Ford's credit-rating could be downgraded soon and its dividends slashed, if the company’s turnaround plan fails to produce results. Should the U.S. economy slip into a recession or face a sharp slowdown, demand for gas-guzzling SUVs will erode. But for those with the stomach to remain invested in the automaker through the ups and downs, Ford could be a very lucrative bet.
2. AT&T
America’s largest telecom operator, AT&T Inc (NYSE:T), is another high-reward, albeit potentially high-risk bet for retirees. With an annual dividend yield of 5.5%, it offers one of the best returns available from a blue-chip stock with a long track-record of paying dividends. The shares have gained 31% since the start of the year, closing yesterday at $37.41.
But with this return comes significant uncertainty about this iconic brand as its core operations struggle to produce growth, and the company accumulates a huge load of debt. AT&T’s dismal performance over the past five years is now coming under more scrutiny, prompting its largest investors to openly question CEO Randall Stephenson’s plan to transform the company into a modern media giant by acquiring large companies.
While this strategy has grabbed headlines and made investment bankers rich, it’s also saddled AT&T with $186 billion of debt, making it the largest non-finance indebted firm on Earth.
Last week, Elliott Management Corp., a hedge fund with an activist agenda and a $3.2-billion stake in AT&T, criticized Stephenson for his blockbuster acquisitions, including its $85-billion deal to buy Time Warner assets last year. In a letter to the board, the hedge fund suggested some corrective measures to put the company on a sustainable growth path.
They include selling the loss-making DirecTV unit and the company’s wireless operations in Mexico, empowering the board to hold Stephenson’s team more accountable and avoiding any more big M&A deals.
For investors, the decision at this point is whether AT&T will successfully transform its business and be able to compete with such entertainment sector disruptors as Netflix Inc (NASDAQ:NFLX), and whether such a success would save its $0.51 a share quarterly payout.
3. Exxon Mobil
After cars and cellphones, energy is something long-term investors should focus on to earn stable and growing returns. One of America’s “supermajors,” Exxon Mobil Corp (NYSE:XOM) certainly fits the bill.
The company has impressive scale in everything from drilling to refining to the U.S. shale region. And while the stock is unlikely to produce massive gains for investors, it remains a top pick for long-term energy bulls. Shares, which have inched up just 1% since the beginning of 2019, closed yesterday's session at $68.95.
The multinational oil and gas giant is in the middle of investing billions of dollars to improve its growth, diverging from other large producers that are trying to stabilize their shares by cutting back on major spending.
Exxon's CEO, Darren Woods, believes the oil industry needs a significant injection of fresh investment to meet the new challenges it faces and has embarked on a $230 billion plan to revitalize the company, targeting drilling opportunities around the world.
XOM pays a quarterly dividend of $0.87 a share, with a yield touching 5%. But buying the stock means you’re betting that the future of big oil companies is safe and that Exxon will continue to produce sufficient cash to cover its payouts.
Bottom Line
Investing in turnaround situations can produce huge returns over time. But these companies certainly carry more risk, so investors should be very careful in deciding which high-yielding stocks to select.