Annual inflation is at 8.3% right now. That means investors need a rate of return higher than this simply to preserve purchasing power.
This puts income-oriented investors in a tough position.
The average stock in the S&P 500 index offers a dividend yield of just 1.4%. Not only is that below the current rate of inflation, but it’s also below the Federal Reserve’s long-term target inflation of 2%. Put simply, dividend investors are losing ground.
High-yield dividend stocks can offer better yields. To be sure, a high yield can be a sign that the dividend is in danger. But if you can find solid businesses offering dividend yields above 8%, you might have an attractive risk/reward opportunity on your hands.
Here’s a look at three potentially profitable high-yield stocks.
Icahn Enterprises (IEP)
Carl Icahn doesn’t get nearly as much attention as Warren Buffett. The two men have strikingly different investment styles, but they’ve both outperformed the S&P 500 for decades.
The investment legends also have different views on shareholder rewards. Buffett prefers to retain all excess cash flow, which is why Berkshire Hathaway doesn’t pay a dividend. Icahn prefers to return most of his company’s excess cash flow back to shareholders.
Icahn Enterprises currently offers a 15.7% dividend yield. The cash is derived from income and capital gains generated on the company’s broad investments in the energy, automotive, food packaging, metals, real estate, and home fashion sectors.
Rio Tinto (RIO)
British mining giant Rio Tinto is another high-yield dividend stock. It currently trades offers a 10.5% dividend yield. The stock also trades at a price-to-earnings ratio of 5.9 — which is arguably cheap.
Rio Tinto’s stock is up 17% year to date, but its underlying fundamentals are strengthening faster. Revenue surged 42% last year while net cash generated from operations surged 60% over the same period.
Nearly every mineral in the company’s portfolio is in a strong bull market. Copper, lithium, iron ore and aluminum are all trading at record prices. These prices have encouraged management to deploy more cash into expansion. The recent acquisition of the Rincon lithium project in Argentina for $825 million highlights this fact.
These minerals are critical to the green energy and electric vehicle transition, which is why Rio Tinto could see further upside in the years ahead.
Lumen Technologies (LUMN)
Communications technology giant Lumen Technologies has been on an acquisition spree in recent years. This broadened the company’s portfolio of tech services and prompted the management team to rebrand. However, these initiatives haven’t unlocked value for the shareholders yet.
The stock has been dragged lower along with the rest of the tech sector. Lumen has lost 20% of its value over the past year.
However, unlike other tech companies, Lumen is profitable and cash flow positive. In fact, the stock pays an 8.5% dividend yield. That’s substantially higher than the rest of the tech sector — where many stocks don’t pay a dividend at all
Investors are worried about the company’s debt burden — which is 2.3 times greater than the value of its equity. However, the stock trades at just five times earnings, which could make the risk-reward ratio attractive for some investors.
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