20 value stocks with high dividend yields and expected room to raise payouts

By Philip van Doorn

A look at trailing cash flow and expected cash flow show these components of the Russell 1000 Value Index are expected to have no problem covering dividend payments

Last week's action in the stock market might have signaled a long-awaited shift away from a focus on Big Tech in the stock market to overlooked pockets of value.

That action was summarized in this article on Monday, which included a screen of the Russell 1000 Value Index RLV to list stocks favored by analysts working for brokerage firms.

Now let's look at stocks in the same index that have high dividend yields. With a possible cycle of interest-rate cuts by the Federal Reserve coming in light of cooling inflation, investors might want to become familiar with some additional sources of income, because the time of 5% yields on bank CDs may soon be over.

There are various ways to screen dividend stocks and it is important to take care when selecting them. FactSet calculates dividend yields by dividing total dividends per share paid by a company over the past 12 months by its current share price. A dividend yield that is very high could be a signal that a cut to the payout is coming - the share price is low because investors have cold feet.

Read: Four deep-value stocks flagged, as one asset class seeks a comeback

One approach to dividend stocks for investors who don't need to maximize current income but expect to need it later, is to buy stocks of companies that have consistently raised payouts. There are many companies for which dividend yields relative to the prices paid for the stocks have gotten quite high for patient investors. In May, we looked back five years to identify the best dividend growers among the S&P 500 Dividend Aristocrats - a group of companies in the S&P 500 SPX that have raised their dividend payouts for at least 25 consecutive years. That group showed solid overall performance (total returns with dividends reinvested) for the most part.

Screening high dividend yields among components of the Russell 1000 Value Index

What if you want to focus on maximizing current income from some new stock selections? You had better be careful, because even a hint of a dividend cut can cause a brutal decline in a company's share price.

One way to screen for companies' ability to maintain and hopefully raise its dividend yield is to look at their free cash flow yields.

Free cash flow (FCF) is remaining cash flow after capital expenditures. This money can be used to pay dividends, buy back shares (which can raise earnings and cash flow per share), or for other corporate purposes, including organic expansion or acquisitions.

If we divide a company's estimated annual FCF per share by its current share price, we have its estimated FCF yield. We can also look back over the past 12 months for a trailing FCF yield. If we compare the FCF yield to the current dividend yield, we may see "headroom" for cash to be deployed in ways that can benefit shareholders, including dividend increases.

If a stock with a 5% dividend yield has an estimated FCF yield of 7%, it appears to have headroom of 2%.

We narrowed the 872 components of the Russell 1000 Value Index to the stocks with the highest dividend yields that showed at least 2% headroom, based on their current dividend yields as calculated by FactSet, as well as their trailing and estimated FCF yields.

For banks, FCF information isn't available. But in this heavily regulated industry, earnings per share can be a useful substitute to make similar headroom estimates. We also used EPS for real-estate investment trusts that engage mainly in mortgage lending.

For real-estate investment trusts that own and rent out property (a group known as equity REITs), we can look at funds from operations (FFO), a non-GAAP figure commonly used to gauge dividend-paying ability in the REIT industry. FFO adds depreciation and amortization back to earnings, while netting-out gains on the sale of property. This can be taken further with adjusted funds from operations (AFFO), which subtracts the estimated cost to maintain properties.

So this dividend screen of Russell 1000 Value Index only included companies for which trailing and consensus FFO figures (or EPS or AFFO as explained above) were available. And to have a decent-sized data set for consensus estimates, the list was limited to companies covered by at least five analysts polled by FactSet.

Here are the 20 stocks with the highest dividend yields that met the criteria:

   Company                         Ticker   Dividend Yield  Trailing headroom  Forward headroom  Headroom calculation method 
   Medical Properties Trust Inc.    MPW             12.63%             10.32%             3.25%                         AFFO 
   Kohl's Corp.                     KSS              9.14%             21.91%            12.20%                          FCF 
   Rithm Capital Corp.              RITM             8.90%              4.42%             7.00%                          EPS 
   EPR Properties                   EPR              7.88%              3.78%             3.42%                         AFFO 
   Verizon Communications Inc.       VZ              6.52%              4.57%             4.61%                          FCF 
   Columbia Banking System Inc.     COLB             6.46%              4.00%             4.84%                          EPS 
   Antero Midstream Corp.            AM              6.16%              2.76%             3.88%                          FCF 
   Clearway Energy Inc. Class C     CWEN             6.11%             10.66%            14.00%                          FCF 
   Kilroy Realty Corp.              KRC              6.04%              4.77%             3.68%                         AFFO 
   W. P. Carey Inc.                 WPC              5.98%              2.58%             2.21%                         AFFO 
   Bristol-Myers Squibb Co.         BMY              5.98%              9.42%             8.00%                          FCF 
   AT&T Inc.                         T               5.97%             10.42%             7.06%                          FCF 
   Clearway Energy Inc. Class A    CWEN.A            5.61%             12.55%            16.17%                          FCF 
   LyondellBasell Industries NV     LYB              5.60%              3.00%             2.67%                          FCF 
   Organon & Co.                    OGN              5.40%              4.12%            10.98%                          FCF 
   Park Hotels & Resorts Inc.        PK              5.39%              2.76%             4.06%                         AFFO 
   Franklin Resources Inc.          BEN              5.34%              4.09%             6.90%                          FCF 
   Simon Property Group Inc.        SPG              5.33%              2.62%             2.22%                         AFFO 
   NNN REIT Inc.                    NNN              5.14%              2.13%             2.41%                         AFFO 
   Comerica Inc.                    CMA              5.06%              3.93%             4.53%                          EPS 
                                                                                                             Source: FactSet 

Even a screen showing a relative comfort level for dividend paying ability guarantees nothing. Before buying any stock, you should do your own research and form your own opinion about a company's business strategy and its long-term viability. One way to being that process is by clicking on the tickers for more information about each company, including corporate profiles, news coverage, price ratios, charts and stock performance.

Click here for Tomi Kilgore's guide to the wealth of information available for free on the MarketWatch quote page.

Don't miss: The time may be right for value stocks - here are Wall Street's favorites

-Philip van Doorn

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07-20-24 0800ET

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