Generous dividend yields can be dangerous. Double-digit dividend yields often show that a company is in deep trouble, where a solid run of increased payouts failed to propel share prices higher. At the same time, ATM companies can derive their payouts from excessive cash flows, resulting in strong returns that can last for many years.
Luckily, there are some perfectly healthy high-yield dividend stocks on sale right now. Read on to see how International business machines (NYSE: IBM) And Darden Restaurants (NYSE:DRI) would fit into an income-oriented equity portfolio today.
The average U.S. savings account offers an annual return of about 0.5%. The S&P500 (SNPINDEX: ^GSPC) The market index has achieved an average dividend yield of 1.6% over the past five years and currently stands at just 1.3%.
With dividend yields of 3.5% for Darden stock and 3.1% for IBM stock, these cash-sharing veterans are on a different level. Of these popular wealth storage options, only individual stocks can exceed the government’s long-term inflation target of around 2% per year.
At first glance, these two household names don’t have much in common. Big Blue is a legend in the computing industry and has built a promising artificial intelligence (AI) company just in time for a massive AI explosion. Darden operates full-service restaurant chains such as Olive Garden, Bahama Breeze and Longhorn Steakhouse. The company is expanding its international operations while converting many domestic locations. Apples, meet oranges.
But they actually have a lot in common where it matters most. The two companies are growing revenue and generating robust cash profits. They also have an obligation to share their cash flows with investors in the form of strong and growing dividends.
IBM generated $12.4 billion in free cash flow over the past four quarters. It funneled 49% of that excess cash into dividend checks. Darden used 64% of its $992 million free cash flow for the same purpose. Both dividend policies are fully funded by current cash profits and have room to grow without causing a financial crisis.
Finally, Darden and IBM are established leaders in their respective industries, with compelling growth plans for the near future. Still, their shares look quite affordable compared to their competitors in the market. Buying the shares now will lock in the juicy dividend yields and provide ample opportunity to enjoy long-term price gains.
Remember, Darden has been around for almost a century, and IBM has even more experience. These deep-pocketed income generators should stick around for decades to come, building shareholder wealth along the way thanks to a generous dividend policy.
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*Stock Advisor returns October 21, 2024
Anders Bylund has positions in International Business Machines. The Motley Fool holds positions in and recommends Chipotle Mexican Grill, CrowdStrike, Microsoft and Wingstop. The Motley Fool recommends International Business Machines and recommends the following options: long calls in January 2026 for $395 on Microsoft, short calls in December 2024 for $54 on Chipotle Mexican Grill, and short calls in January 2026 for $405 on Microsoft . The Motley Fool has a disclosure policy.
2 High-Yield Dividend Stocks That Are Screaming Buys Right Now originally published by The Motley Fool
