If you like shopping for high-yield dividend stocks, the past couple of years have been more than a little frustrating. A buoyant stock market has pushed the average yield of stocks in the S&P 500 down to an unattractive 1.3% at recent prices.
But not every stock has seen its yield sink. Western Union(NYSE: WU) and Royalty Pharma(NASDAQ: RPRX) have seen their stocks fall over the past two years, and their yields have risen. Here's a closer look to see if they could be bargains now.
1. Western Union
Shares of Western Union are down by more than half from a high-water mark the stock set in 2020. The number of consumer money transfer transactions it processes rose 4% year over year in the second quarter, to an annualized 293.2 million. Unfortunately, this is just 3.8 million more transactions than it processed in 2019.
Western Union stock offers a huge 7.9% dividend yield at recent prices, but investors expecting the payout to grow could be disappointed. Western Union has held its quarterly payout at $0.235 per share since the beginning of 2021.
Iraq banning dozens of banks from conducting dollar transactions impeded Western Union's revenue growth by 7% year over year in the second quarter. Iraq wasn't the only problem pressuring sales. Total second-quarter revenue fell 9% year over year.
With roots that date back to 1851, Western Union is arguably the most trusted international remittance service provider on the planet. This allows it to charge fees and provide less attractive exchange rates than its competitors, but this advantage is dissolving.
Before you pounce on Western Union for its ultra-high dividend yield you should also know it's losing market share to scrappy young upstarts such as Wise, formerly TransferWise. During its fiscal first quarter that ended this June, Wise reported transfer volume that rose 18% year over year to 33.2 million.
Remitly is much smaller than Wise, with 6.9 million active customers at the end of June. Unfortunately for Western Union, it's growing by leaps and bounds. Second-quarter revenue rose by 31% year over year.
Western Union expects total revenue to land in a range between $4.125 billion and $4.2 billion this year. Even the high end of this range is 6.5% less than the company reported in 2022.
Western Union stock has been trading for the ultra-low valuation of 7.4 times trailing earnings, but those earnings are shrinking as the company loses market share. Its well-recognized brand could help it slow the decline, but it's probably best to avoid this stock until the underlying business proves it can compete in an increasingly crowded arena.
2. Royalty Pharma
Royalty Pharma is essentially a specialized lender that serves the capital-intensive biopharmaceutical industry. At recent prices, the stock offers a 3% yield and perhaps much more down the road.
It isn't unusual to see start-up drugmakers operate for over a decade without any sources of recurring revenue. As its name implies, Royalty Pharma provides loans that companies repay with royalties on future sales of the candidates they're developing.
Drug development is famously unpredictable, but Royalty Pharma's pretty good at selecting borrowers likely to produce a royalty stream. From 2010 through 2020, portfolio receipts rose by 13% annually, and it could maintain this pace. Portfolio receipts in the second quarter rose 12% year over year to $608 million.
Steadily rising portfolio receipts have allowed this company to raise its quarterly payout by 40% since it began paying dividends in 2020. Investors can look forward to continued gains for many years to come. Royalty Pharma expects to deploy $2 billion in 2024 to acquire royalties, and there's a lot of room for growth. The company thinks the biopharma industry will need over $1 trillion more capital in the decade ahead.
Royalty Pharma is trading for 18.6 times trailing earnings. That's a low valuation for a company that's been growing by a double-digit annual percentage. Adding some shares of this bargain stock to a diversified portfolio and holding on for the long run is a smart move.
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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
