Today, I am rushing to get 2020 taxes filed in hopes of getting the next stimulus check. We had a one-time business event in 2019 that put us out of the range. In 2020, with a loss of some income due to COVID, we’ll probably qualify. If we can get our 2020 taxes to the tax preparer today, we may get them filed in time. If you are in a similar situation, I hope you are getting your taxes in quickly too.
Nate Parsh at Sure Dividend was kind enough to fill in with one of my favorite topics of late – high-yield dividend stocks. At the end of the article, I explain why I like them so much lately.
With the 10-year treasury bond and the S&P 500 both yielding approximately 1.5%, investors looking for income may feel that their investment choices are limited.
One way to produce more income would be to seek out higher-yielding investments. However, this is not without risk, as a high yield could be a sign of a company facing significant challenges. Income investors should be wary of the highest-yielding stocks, as a dividend cut could be forthcoming. Still, there are many high dividend stocks that offer a very safe dividend.
The following 3 dividend stocks have yields significantly above the market average, along with the potential for future dividend growth.
AT&T Inc. (NYSE: T) can trace its roots back to the late-1800’s and Alexander Graham Bell. Today, the company is the largest communication company in the world. AT&T has a market capitalization in excess of $200 billion and generated almost $172 billion of revenue in 2020.
AT&T’s business did face some COVID-19 headwinds last year, particularly in the company’s WarnerMedia and domestic wireless services business. Overall, revenue declined 5% while adjusted earnings-per-share decreased 11%. AT&T stated that the pandemic reduced adjusted earnings-per-share by $0.43 during the year. That said, the company does expect both top and bottom-lines to grow ~1% in 2021 as business stabilizes.
AT&T has loaded up its balance sheet over the past few years thanks to a number of high-profile acquisitions, including the company’s purchase of DirectTV in 2015 for $48.5 billion ($67 billion when including debt) and its $85.4 billion purchase of Time Warner in 2018. Total debt reached a high of nearly $170 billion in 2018 as a result.
To its credit, AT&T has worked diligently to reduce its debt obligations over the past few years by divesting non-core assets, including selling its stake in Hulu in 2019. More recently, the company has announced that it will be selling a minority interest in DirecTV to a private equity firm. Originally, the company was looking to sell the entire business.
The company used proceeds from the sale of its stake in Hulu (~$1.8 billion) to pay down debt. AT&T has pledged to do the same with the nearly $8 billion it will receive in the DirecTV transaction. While debt remains high (approximately $152 billion as of the end of 2020), the coverage ratio has improved slightly and AT&T has a targeted cover ratio of 2.0 to 2.5x by 2022 down from 2.8x just two years prior.
Even with the recent difficulty, we believe AT&T an attractive option for income investors as the company produces robust levels of free cash flow every year. For example, the company generated $27.5 billion of free cash flow last year and expects to produce a similar amount in 2021. Just 61% of free cash flow last year was distributed in the form of dividends.
Shares offer a 7.4% dividend yield and the company has raised its dividend for 36 consecutive years, which makes it a member of the Dividend Aristocrat index. With a projected earnings payout ratio of 65% for the current year, the sheer size of the company’s free cash flow, and the ongoing reduction in debt, it is likely that AT&T’s high dividend yield is very safe from a potential cut.
International Business Machines Corporation
International Business Machines Corporation (IBM) provides integrated enterprise solutions for software, hardware, and services. The company typically provides end-to-end solutions for its customers, making IBM a one-stop shop for its clients. IBM has a market capitalization of $108 billion and produced revenue of almost $74 billion last year.
Somewhat famously, IBM has reported declining revenues for several years in a row. This continued in 2020 as sales fell 6.5% and 4.6% for the fourth quarter and full year, respectively.
The demand for cloud-related product offerings has surged over the past few years and IBM has been slow to react to the sea change. IBM has tried to gain more of a foothold in this space by acquiring Red Hat for $34 billion in 2019.
Under the direction of new CEO Arvind Krishna, IBM will be splitting into two companies. The new IBM will contain the Hybrid Cloud and AI business with a focus on software. The second company, which is yet to be named, will focus on Managed Infrastructure Services. This is a good move in our opinion as the growth rates for the cloud business will likely be higher than the legacy business.
IBM is clearly behind other cloud giants, but this is a sector that is expected to grow at a high double-digit percentage over just the next five years. Focusing an entire company on cloud computing should pay off for the new IBM.
While IBM’s business has been rather poor over the last decade, it has still provided a strong dividend yield. The company has now increased its dividend for the past 25 years, which has gained the company membership among the Dividend Aristocrats. Dividend growth has been solid, with a compound annual growth rate of 8.4% over the last decade.
The dividend appears to be well protected as well. The company distributed just 39% of its $15 billion of free cash flow in the form of dividends last year. IBM’s projected earnings payout ratio is 59% for 2021, down from 75% last year.
With a 5.3% yield, shareholders are being paid generously to wait for the company to find its place in the cloud computing space.
Ford Motor Company
Ford Motor Company (F) was incorporated in 1903 and, over the last 118 years, has transformed into one of the world’s largest automakers. The company provides a popular assortment of cars, trucks, and SUVs. Ford is valued at just under $50 billion and generated revenues of $116 billion in 2020.
Ford may seem like an odd addition to a list of attractive dividend-paying stocks since the company paused its dividend in the midst of dealing with COVID-19. That being said, the stock offered a high yield for quite some time leading up to the pandemic. Shares averaged a dividend yield of 5.2% from 2015 through 2019, showing that Ford was no stranger to paying a high yield.
The company needed all available capital to make it through the worst parts of the pandemic and prudently paused its dividend.
Leadership did not mention what conditions would need to occur for the dividend to be reinstated, but we believe that a recovery from the COVID-19 pandemic will eventually take place. With the start of the vaccine rollout and additional stimulus from governments around the world, we feel that Ford could be in a prime position to return to pre-pandemic growth once COVID-19 is dealt with.
Even under difficult circumstances, Ford still had free cash flow of $18.5 billion in 2020. In 2019, the last year the company paid each of its quarterly dividends, the free cash flow payout ratio was a very reasonable 40%.
While Ford likely faces headwinds in the near term due to the unknown duration of COVID-19, there appears to be a possibility that the company could reinstate its dividend at some point. Given Ford’s history and free cash flow, it is likely that the yield could be quite generous for shareholders willing to take a long-term view of the company.
Income investors are limited on their investment options in today’s market. This class of investors also has to be careful in reaching for yield. AT&T and IBM are two companies that have short-term challenges, but pay a generous and well-covered dividend. For investors with more risk appetite, Ford could also offer a high yield following a recovery from the pandemic.
Disclosure: The author (Nate Parsh) is long T
Disclosure: The publisher (Lazy Man and Money) is long all three stocks (T, IBM, and Ford)
With the disclosure above, you may notice that I invest in all the above companies. I had given Nate some ideas to look into for the article. Before Ford paused its dividend, it was paying out around a 12% yield as the market crashed with COVID. I decided to hold on, even with the paused dividend, and the stock is up nearly 100% from where I bought it at. If they resume dividends it could have a high yield on cost.
I’ve become more of a fan of high-yield dividend stocks over the last few years because the interest rates from other investments have been low. There may be more risk in these individual companies, but I think it is worth it.