2 Blue Chips To Buy And Hold, Up To 9% Yield

Vivek VishwakarmaMeme stocks have come back in fashion as of late, with ‘Roaring Kitty’ coming back to the public consciousness touting GameStop (GME) stock. I must admit that I watched his YouTube broadcast last week and found it to be entertaining, but that doesn’t mean I’ll be investing in GME anytime soon. Rather, I prefer to invest in quality companies that throw off meaningful cashflows, which can be reinvested in the business, to buy back shares, and most importantly, to support a strong dividend yield. I suppose these stocks are my version of ‘roaring’ dividend stocks that provide sleep well at night returns without a high level of speculation behind a turnaround. This brings me to the following two stocks, which pay hefty dividend yields ranging from 5-9%. In this article, I highlight why they represent terrific opportunities at present for high yield investors in search of value and income, so let’s get started! #1: British American Tobacco British American Tobacco (BTI) is a global giant that’s made significant progress in transforming itself from a strictly tobacco business to one that offers both traditional and next generation products, including vaping, heat-not-burn, and nicotine pouches. BTI’s stock has floundered in recent years, due in part to uncertainty around a potential menthol ban, plans of which have recently been shelved by the Biden administration. In addition, like Altria (MO), BTI’s combustible volumes in the U.S. have been falling at higher than historical rates due to inflation, illegal vaping, and switching to legal vaping and nicotine alternatives. Despite these headwinds, BTI retains plenty of market share and pricing power to meaningfully offset the impact of volume declines. Moreover, in BTI’s first-half 2024 pre-close trading update, management reiterated guidance for low single digit organic revenue and adjusted profit growth for the full year, with growth being weighted more in the second half of this year. This is supported by strong momentum in NGP’s, with Vuse maintaining global market share leadership at 41% in key markets, with a Vuse 2.0 offering on the way to roll-out this year, featuring a removable battery and better design than previous versions. Moreover, BTI’s heat-not-burn device, glo, is seeing slowing market share loss of 20 bps in key markets (compared to 110 bps share loss in 2023) with the roll-out of glo Hyper Pro, and management is seeing strong performance in its Veo, a non-tobacco offering. Importantly, management remains committed to reducing its leverage ratio to the 2.0x to 2.5x range by the end of this year, and has thus far monetized 3.5% of its ITC stake, enabling share buybacks. With a forward PE of just 6.56, BTI is getting a very high 15% earnings yield for every dollar spent on buybacks. For the full year, management expects to buy back $895M worth of shares, which equates to 1.3% of BTI’s current equity market cap of $68.7 billion. BTI currently yields 9.5% and has plenty of retained cashflow with a 65% payout ratio to further reduce its debt. It’s also demonstrated a commitment to raising its dividend with a 2.0% increase earlier this year (subject to currency fluctuations). At the current price of $30.71 with a forward PE of just 6.6x, BTI trades far under its historical PE of 13.3, as shown below. FAST GraphsAt this low of a PE, the market appears to be over-weighing the negatives such as a potential menthol ban in the U.S., the implementation of is expected to be several years away even if it’s passed, and the decline of combustibles, while ignoring the positives from BTI’s NGP momentum. Analysts expect 5% annual EPS growth over the next couple of years, which when combined with the dividend yield could produce around 15% total returns annually for investors even without counting on a reversion to mean valuation. #2: Simon Property Group Simon Property Group (SPG) is one of the biggest REITs on the market today. It’s also an S&P 100 company with a formidable portfolio of Class A Malls and Premium Outlets across the U.S, Europe, and Asia. The narrative of retail properties becoming dinosaurs in a growing e-commerce world may have credence as it relates to lower quality properties, but SPG has largely bucked this trend as both consumers and retailers continue to value in-person shopping and product placement in high foot traffic destinations, which SPG possesses. This is reflected by SPG’s respectable 3.9% portfolio NOI growth during Q1 2024 compared to the prior year period. This was driven by strong occupancy growth of 110 bps YoY to 95.5% and base minimum rent growth of 3.0% to $57.53 per square foot per month. High quality malls remain highly sought after, as demonstrated by SPG’s Mills destinations achieving a portfolio high occupancy of 97.7%. Management is guiding for 2.5% FFO per share growth this year to $12.83 at the midpoint of range. Key drivers of growth this year include successes with SPG’s tourist-oriented properties, which include Premium Outlets that have achieved all-time high sales per square foot. In addition, new developments and redevelopments that include mixed use properties such as an AC Hotel at one location, Tulsa Premium Outlets in Q3, and expansion of Busan Premium Outlets in South Korea provide potential for upside to guidance should these openings be more successful than anticipated. SPG’s developments are supported by a strong balance sheet with $11.2 billion in total liquidity, and it’s one of the few REITs to have an A- credit rating from S&P. SPG also carries a reasonable net debt to EBITDA ratio of 6.2x, considering its development pipeline. Importantly, SPG has growing its dividend by 8.1% over the past 12 months, and the dividend is well-covered by a 62% payout ratio based on the aforementioned $12.83 FFO per share guidance for this year. Lastly, SPG continues to trade at a material discount at the current price of $152 with a forward P/FFO of 12.0x, sitting well under its historical P/FFO of 14.6, as shown below. FAST GraphsWith a respectable 5.3% dividend yield, strong property portfolio, and my expectations for annual mid-single digit FFO/share growth over the long run, SPG could produce market-level total returns even without a reversion to mean valuation, all with a far higher yield than the 1.25% of the S&P 500 (SPY). Investor Takeaway Both British American Tobacco and Simon Property Group exemplify quality high-yield investments that remain misunderstood by the market. BTI is navigating industry challenges with its strategic pivot to next-generation products while maintaining significant cash flows and a substantial dividend yield of 9.5%. SPG leverages its premium retail property portfolio and strong financial health to sustain a solid 5.3% dividend yield. It’s demonstrating portfolio NOI and base rent growth, reflecting resilience and growth in a shifting retail landscape. Together, they represent what I would consider as ‘blue chip’ opportunities for income-focused investors seeking reliable dividends and potential value appreciation.

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