3 High-Yield Stocks With Stable Dividends

David Swartz: Department store stocks Macy’s, Kohl’s, and Nordstrom are high-yielding dividend stocks and we think each of them has currently stable dividends with growth potential. Moreover, we view all of them as undervalued at current levels.

Department stores have struggled with weak store traffic and a competitive apparel market in 2019. We acknowledge these challenges and expect that competitive pressures will continue. Yet, Macy’s, Kohl’s, and Nordstrom are among the largest U.S. retailers both in-store and online; none of them are in financial distress.

Macy’s pays an annual dividend of $1.51 per share, giving it a dividend yield of nearly 10%. We rate Macy’s as a no-moat company and our fair value estimate is $27 per share. Management has stated it will not cut its dividend but, given the very high yield, this must be viewed as a possibility. Macy’s raised its dividend consistently until 2017 but has kept it at the $1.51 level since, as it has prioritized debt reduction. We forecast Macy’s will pay about 52% of 2019’s earnings as dividends and expect a 45% dividend payout ratio in the long term. We project Macy’s will hold its dividend constant through 2022 as it continues to pay down debt, and then begin to increase its dividend again in 2023. We forecast it will generate more than enough cash free flow to cover its dividend for the foreseeable future. Also, Macy’s owns significant real estate which could be sold, providing an extra level of safety.

Nordstrom pays an annual dividend of $1.48 per share, giving it a dividend yield of just under 5%. We rate Nordstrom as a narrow-moat company and our fair value estimate is $55. Nordstrom raised its annual dividend consistently until 2015 but has held it at $1.48 per share since then due to investments in large capital projects, most of which are near completion. We forecast Nordstrom will pay about 45% of its 2019 earnings as dividends and, in the long term, we forecast a dividend payout ratio of 40%. We expect Nordstrom to begin to increase its dividend again in 2022 and think it will generate more than enough free cash flow to cover its dividends.

Kohl’s will pay a dividend of $2.68 per share in 2019, a dividend yield of more than 5%. We rate Kohl’s as a no-moat company and our fair value estimate is $75. Kohl’s began paying dividends in 2011 and has raised its dividend in every year since. We forecast Kohl’s will continue to increase its dividends over at least the next 10 years and pay about 55% of its earnings as dividends. We think it will produce more than enough free cash flow to cover its dividends.