3 Contrarian Income Plays Yielding up to 8.6%
These Dividend Stocks Look Interesting
For the most part, I don’t consider myself a contrarian investor. By definition, a contrarian investor purposefully goes against the prevailing market trends. And if the trend does not reverse, the investor might need to wait a long time before making any profit.
Still, when it comes to dividend investing, there could be some benefits by taking a contrarian view of a particular trend right now: the downfall of physical retail.
You see, stock market participants are generally no longer fans of companies that operate brick-and-mortar stores. And they have a good reason to be concerned: in 2017, retailers closed a staggering 102-million square feet of store space. In 2018, they closed another 155-million square feet. And while we are just over halfway through 2019, retailers have already announced over 7,500 store closures. (Source: “More than 7,500 stores are closing in 2019 as the retail apocalypse drags on — here’s the full list,” Business Insider, July 12, 2019.)
At many physical retailers, things don’t look good at all. Gap Inc (NYSE:GPS) recently announced that they would close 230 stores in the next two years. Gymboree Group Inc, which already filed for Chapter 11 bankruptcy earlier this year, recently said that it is shutting down more than 800 stores under its Gymboree and Crazy 8 banners. Even Victoria’s Secret, a subsidiary of L Brands Inc (NYSE:LB), has noted a “decline in performance” and is on track to close 53 stores in North America this year. (Source: “Victoria’s Secret is closing dozens of stores,” Business Insider, February 28, 2019.)
With stories like these, retail stocks are not exactly the ones shooting through the roof, to say the least.
But here’s the neat part: In dividend investing, there is an inverse relationship between a company’s stock price and dividend yield. That is, at any given cash payout, the lower the stock price, the higher the yield becomes.
And that’s why I think there might be an opportunity by being a contrarian investor. Due to the lack of investor enthusiasm towards the retail industry, many retail stocks have experienced sharp drops in their share prices. As a result, their yields look elevated.
Of course, if a retailer’s business deteriorates to a point where it can no longer support its dividend policy, then its stock would not be worth considering no matter how high its yield has become. At the end of the day, risk-averse income investors don’t want to be near dividend cuts.
However, if a beaten down retail stock has the ability to cover its dividends, then its oversized yield could be a contrarian opportunity. Sure, it may take a while for the market to warm up to the retail industry again, but dividends are cold, hard cash paid to investors regardless of what the market thinks about the stock. In an era where most companies can’t even pay four percent, a solid high-yield stock from the retail industry could make a good contrarian argument.
With that in mind, let’s check out three retail stocks that could turn out to be rewarding income plays.
List of Three High-Yield Contrarian Dividend Stocks
|Company Name||Stock Symbol||Dividend Yield|
|Kohl’s Corporation||NYSE: KSS||5.4%|
|Macy’s Inc||NYSE: M||6.9%|
|Tanger Factory Outlet Centers Inc.||NYSE: SKT||8.6%|
Headquartered in Menomonee Falls, Wisconsin, Kohl’s Corporation (NYSE:KSS) is a department store retailer with over 1,100 locations in 49 states. Like many retail stocks, KSS hasn’t been a hot commodity lately; over the past 12 months, the company’s share price has tumbled more than 30%.
As you’d expect, such a downturn in Kohl’s stock price has elevated its dividend yield. With a quarterly dividend rate of $0.67 per share, the company provides investors with a generous annual yield of 5.4%. To put this in perspective, the average dividend yield of all S&P 500 companies is just under 1.9% at the moment. (Source: “S&P 500 Dividend Yield,” Multpl.com, last accessed July 16, 2019.)
And despite offerings a yield nearly three times the benchmark’s average, Kohl’s Corporation has no problem covering its payout. In the company’s fiscal year 2018, which ended February 2, 2019, its adjusted earnings came in at $5.60 per share. Considering that Kohl’s paid four quarterly dividends totaling $2.44 per share for the fiscal year, its payout ratio came out to 43.6%. (Source: “Kohl’s Corporation Reports Financial Results,” Kohl’s Corporation, March 5, 2019.)
What’s even better is that rather than paying a stable dividend—which would already be considered a nice achievement given the headwinds in the industry—Kohl’s payouts have been on the rise. In just the last five years alone, the company’s quarterly dividend rate has increased by 71.8%. (Source: “Cash Dividends & Stock Splits,” Kohl’s Corporation, last accessed July 16, 2019.)
The best part is, rather than having its business taken away by online vendors, Kohl’s might be able to turn the e-commerce boom into a catalyst.
You see, over the past several years, consumers have embraced online shopping, and Amazon.com, Inc. (NASDAQ:AMZN) turned out to be one of the biggest winners. Just take a look at the AMZN stock chart and you’ll see what I mean.
Here’s the neat part: earlier this year, Kohl’s announced that starting in July, all of the company’s stores would be accepting unpackaged returns for Amazon customers for free. (Source: “Kohl’s Announces Expansion of Amazon Returns to All Kohl’s Stores Nationwide,” Kohl’s Corporation, April 23, 2019.)
Note, that Kohl’s had already been running a pilot program testing Amazon returns at 100 of its locations since last July. While the company did not say how much fee it charges Amazon for processing those returns, this arrangement will no doubt bring more traffic to its department store locations.
Just like Kohl’s Corporation, Macy’s Inc (NYSE:M) is another contrarian income play from the beaten-down retail sector. As a department store retailer, Macy’s Inc saw its share price plunging a whopping 40% over the past 12 months to just $22.04 apiece. However, paying quarterly cash dividends of $0.3775 per share, M stock’s dividend yield has now climbed to a very attractive 6.9%.
And if you are wondering whether this out-of-favor stock has the ability maintain its dividend policy, the answer is a surprising “yes.”
You see, Macy’s Inc paid total dividends of $1.51 per share last year while earnings an adjusted net income of $4.18 per share. In other words, the company had a rather conservative payout ratio of 36.1%. (Source: “Macy’s, Inc. Reports Fourth Quarter and Fiscal Year 2018 Earnings and Provides 2019 Guidance,” Macy’s Inc, February 26, 2019.)
For the current year, management expects the company’s adjusted earnings to come in at between $3.05 per share to $3.25 per share. At the current quarterly dividend rate, Macy’s is on track to pay total dividends of $1.51 for the year. That means that if the company meets its guidance range, its adjusted profits would be able to cover its dividend payments more than twice over.
Tanger Factory Outlet Centers Inc.
Lastly, we have Tanger Factory Outlet Centers Inc. (NYSE:SKT), which is quite a bit different from Kohl’s Corporation and Macy’s Inc. Tanger is not a department store chain; instead, it is a real estate investment trust (REIT) with a portfolio of shopping centers.
Right now, Tanger’s portfolio consists of 39 outlet shopping centers located in 20 states in the U.S. and in Canada. The properties, which total 14.3-million square feet, are leased to more than 2,900 stores operated by more than 510 different brand name companies.
And as a REIT, Tanger Factory Outlet Centers Inc. simply collects rent from its tenants, then passes most of that cash on to shareholders in the form of quarterly dividend payments.
Sure, the retail industry is not in the best of shape. But because of the lower pricing and brand name appeal of outlet centers, Tanger’s properties continue to attract over 181 million shoppers on an annual basis.
Still, the downturn in the retail industry has led to disappointing share price performance at this REIT, which could represent an opportunity for yield-seeking investors. With a quarterly dividend rate of $0.355 per share and a share price of $16.50, SKT stock now offers a staggering annual yield of 8.6%.
Mind you, this is not some “too good to be true” situations that we see with many ultra-high yielders. The dividend policy at Tanger Factory Outlet Centers Inc. actually looks rock-solid.
Because Tanger is a REIT, the performance metric to check when it comes to dividend safety is funds from operations (FFO). In order for a REIT’s payout to be considered safe in a given reporting period, it needs to have generated FFO that are in excess of its dividend payments.
The good news is, that’s exactly what we are seeing at this outlet center REIT. In 2018, Tanger Factory Outlet Centers Inc. generated adjusted FFO of $2.48 per share while paying total dividends of $1.3925 per share. That resulted in a very conservative payout ratio of 56.1%. (Source: “Tanger Reports Fourth Quarter And Year End Results,” Tanger Factory Outlet Centers Inc., February 13, 2019.)
In the first quarter of this year, Tanger’s funds from operations came in at $0.57 per share. Again, the amount easily covered its first quarter dividend of $0.35 per share. (Source: “Tanger Reports First Quarter Results,” Tanger Factory Outlet Centers Inc., May 6, 2019.)
As a giant landlord, Tanger’s business has been going quite well, despite investors’ bearish sentiment towards the retail industry. The company’s portfolio had an occupancy rate of 95.4% at the end of March. Moreover, Tanger’s portfolio occupancy has remained at 95% or greater for more than 25 years.
Last but certainly not least, Tanger has achieved something that’s rarely seen among ultra-high yielders: consistent dividend growth. Since the company went public in May 1993, management has increased the dividend every single year. (Source: “Dividend History,” Tanger Factory Outlet Centers Inc., last accessed July 16, 2019.)
Final Thoughts on These Contrarian Dividend Stocks
At the end of the day, keep in mind that these are what I consider to be contrarian income plays at the moment. While they offer generous dividend policies and have no problem covering their payouts, it’s not clear when their share prices will bounce back up due to the headwinds facing the retail industry.
Still, for yield hunters who are patient enough, the oversized dividends provided by these three stocks could be worth considering.