Generous dividend yields can be dangerous. Double-digit dividend yields often show a company is in deep trouble, where a stalwart series of boosted payouts couldn't drive stock prices higher. At the same time, cash-machine businesses can power their payouts from excessive cash flows, resulting in a strong yield that can last for many years.
Fortunately, a couple of perfectly healthy high-yield dividend stocks are on fire sale right now. Read on to see how International Business Machines (NYSE: IBM) and Darden Restaurants (NYSE: DRI) would fit in an income-oriented stock portfolio today.
The average American savings account offers an annual percentage yield of roughly 0.5%. The S&P 500 (SNPINDEX: ^GSPC) market index has seen an average dividend yield of 1.6% over the last 5 years and currently stands at just 1.3%.
With dividend yields of 3.5% for Darden shares and 3.1% for IBM's stock, these cash-sharing veterans are on a different level. Among these popular wealth-storage options, only the individual stocks can outrun the government's long-term inflation target of approximately 2% per year.
These two household names don't have much in common at first glance. Big Blue is a legend of the computing sector, setting up a promising artificial intelligence (AI) business just in time for a massive AI boom. Darden manages full-service restaurant chains, such as Olive Garden, Bahama Breeze, and Longhorn Steakhouse. The company is expanding its international business while remodeling many domestic locations. Apples, meet oranges.
But they actually have a lot in common where it matters the most. The two businesses are growing their sales and collecting robust cash profits. They also have a commitment to sharing their cash flows with investors in the form of strong and growing dividends.
IBM generated $12.4 billion of free cash flows over the last four quarters. It funneled 49% of that surplus 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 they have room to grow without causing a financial crisis.
Finally, Darden and IBM are firmly established leaders in their respective industries, with convincing growth plans for the foreseeable future. Yet, their stocks look quite affordable next to market-darling rivals. Buying the stocks right now will lock in those juicy dividend yields and provide plenty of opportunity to enjoy price gains in the long run.