The Challenge for Income Investors: Dividend Stocks vs. Bonds

Income-focused investors are currently facing a perplexing situation as they search for the most profitable investment opportunities. While bond yields are at a 15-year high, presenting an appealing alternative to dividend-paying stocks, there is still potential for dividend stocks to deliver long-term growth. However, these stocks have been struggling to keep up with the broader equity market, with some experiencing significant declines. Nonetheless, the restaurant industry presents a unique opportunity for investors, as most restaurant stocks have high dividend yields due to their share prices being below their 2021 highs.

This combination of potential rebound and cash dividends makes restaurants an attractive investment option. In particular, Cracker Barrel Old Country Store, Inc. stands out as having the highest dividend yield in the industry. Although the sustainability of the dividend is uncertain, Cracker Barrel is projected to experience a 22% profit growth for the new fiscal year ending in July 2024. Similarly, Wendy’s also offers a tempting dividend yield, but its payout ratio is high, raising concerns about the sustainability of its dividend.

Both stocks have their share of risks, but if they can deliver on their profit growth expectations, they may prove to be rewarding investments. Ultimately, investors must carefully consider the potential risks and rewards before making a decision between dividend stocks and bonds.

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Key Points

1. Restaurants offer attractive dividend yields: With most share prices well off their 2021 highs, restaurants have some of the highest dividend yields available. This presents an opportunity for income-focused investors looking for steady cash flow.

2. Cracker Barrel has the highest dividend yield in the restaurant industry: Cracker Barrel Old Country Store, Inc. NASDAQ: CBRL currently has the highest dividend yield among restaurant stocks. With a 5.5% forward yield, it offers a significant return for investors.

3. Dividend sustainability and profit growth: While restaurants like Cracker Barrel and Wendy’s offer high dividend yields, there are concerns about the sustainability of these payouts. Both companies have high payout ratios and low dividend coverage ratios, indicating potential risk. However, Cracker Barrel is forecast to grow profits by 22% in the new fiscal year, which could offset the dividend risk.

Income-focused investors are currently facing a dilemma when it comes to finding high-yield investments. With share prices of many companies lower than their 2021 highs, restaurants are offering some of the highest dividend yields available. Cracker Barrel, for instance, has the highest dividend yield in the restaurant industry. It is forecasted to grow profits by 22% in the new fiscal year ending July 31, 2024.

On the other hand, with the yield on the 10-Year U.S. Treasury being relatively high and safe, government-backed bonds have become an attractive alternative for investors seeking low-risk ways to earn interest. Compared to three years ago when the 10-Year yield was below 0.4%, the current “risk-free” rates close to 4.0% are alluring.

However, this doesn’t mean that dividend stocks are becoming obsolete or that it’s time to shift entirely to bonds. While dividend stocks may seem less compelling when compared to government-backed income of similar magnitude, they still offer long-term growth potential. On the other hand, bonds offer little to no appreciation but carry minimal principal risk.

Restaurants provide an interesting opportunity for investors looking for a combination of growth potential and dividends. With share prices lower than their previous highs, they offer high dividend yields. One way to implement this strategy is through the AdvisorShares Restaurant ETF (EATZ), which has a 2.0% yield. Cracker Barrel and Wendy’s are two restaurant stocks offering above-Treasury yields.

Cracker Barrel, while having the highest dividend yield among restaurants, carries some risk. While its dividend is currently sustainable, it pays out nearly 80% of its net income as dividends, leaving little profit for growth initiatives. The stock also has a low dividend coverage ratio, which puts it at risk of a dividend decrease. However, the company is forecasted to grow profits by 22%, which could offset the dividend risk.

Wendy’s, on the other hand, has a lower dividend yield but also faces its own challenges. Slowing sales and profit growth, along with higher menu prices, have impacted the company’s financial position. While the dividend was increased earlier this year, the high payout ratio and low dividend coverage ratio suggest a potential risk to the sustainability of the dividend.

Ultimately, the decision to allocate funds between bonds and stocks depends on the investor’s risk appetite and financial goals. Dividend stocks may offer higher growth potential but come with more risk, while bonds provide a safer investment option with lower returns. Investors must weigh these factors before making a decision.

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