A classic mistake that investors make when looking for dividend stocks is to just go for the biggest dividend yield. It makes sense, right? Get the highest return on your cash? Well, not really. This can be very misleading. Typically, the stocks with the highest dividend cannot sustain it.
Some companies start squeezing as much cash as possible out of their operations, cutting costs, cutting corners to get that dividend to the shareholders. In the process, they bleed their business dry and they end up with a company that is in no position to grow. We don’t want that.
The target here is a healthy business with good prospects paying a dividend. Most importantly, I want a dividend to be sustainable and I want companies to have a record of raising the dividend. I don’t want companies that have lowered or suspended their dividend in the last ten years. This is not a foolproof method, but it increases the likelihood that you will get a company that pays a sustainable, growing dividend. Also, with these types of stocks, it is good to manage your expectations. Chances are that you will not see them double or triple in price over a few months like a hot tech stock, but instead, you will get a reliable income year in and year out along with a modest price increase. Right? So, in my opinion, these five dividend stocks are a great deal right now.
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Verizon Communications (VZ)
Okay, so, first off, we have Verizon Communications. Verizon is a telecommunications company and they are currently focusing on building up their 5G capabilities and adoption. One of their flagship services is Fios which is a bundled fiber optic service that provides internet access, telephone and television services. Verizon’s wireless network provides the broadest coverage in the industry although their 5G coverage is only half of T-Mobile’s, but is still better than AT&T’s. Essentially, they are a big, established telecommunications player and they are not going anywhere. Their price right now is decent. Currently, they trade at a PE of 12.2 which has been pretty much typical for the company over the last 5 years and is normal for the industry. They also have a forward PE of 10.9, which is relatively cheap for Verizon so that’s good to see. However, Verizon’s best selling point right now is its dividend. They currently offer a strong dividend of 4.49%, but the best part about it is that Verizon has raised it every single year in the last 10 years! Every single year! Plus, the average for the top 25% of companies in the US by dividends is about 3.5% so Verizon is offering an above-average dividend for the US! The dividend is covered by Verizon’s earnings with the payout ratio being about 55% right now, but it is expected to drop to 49% next year. If you’re not sure what the payout ratio is, it is essentially the dividends divided by the company’s earnings so, with Verizon, we can see that they payout 55% of their earnings as dividends. This is relatively high, but Verizon is a dividend company so a 50% payout ratio is expected and normal. Plus, Finbox’s discounted cash flow model values Verizon at $72 while SimplyWallStreet values the company at an astonishing $150. I doubt it will go up that much, but my point is that Verizon is undervalued based on its free cash flow so that’s another bullish argument for the company. Kellogg (K)
My second favorite dividend stock right now is AbbVie Inc NYSE: ABBV
AbbVie announced on Oct. 29 that it would be increasing its dividend by 8.5%. Its first quarterly payment of 2022 will be $1.41, which, at a share price of around $134, yields 4.2% annually. AbbVie’s streak of dividend increases will hit the 50-year mark next year if its time when the business was part of Abbott Labs (it spun off in 2013) is included, which will also become a Dividend King in 2022.
For 2021, AbbVie projects that its adjusted diluted earnings per share (EPS) will come in at $12.63 or better. Based on that adjusted EPS, the company is paying out less than 50% of its profits. And on a cash basis, the picture looks just as solid: AbbVie has generated $21.7 billion in free cash flow and paid out only $9 billion of that in dividends.
AbbVie’s broad portfolio of products includes treatments for immunology, cancer, aesthetics, eye care, women’s health, and others. That broad mix of drugs can make this an incredibly secure dividend stock to just buy and forget about. The healthcare company has reported a profit margin of at least 10% in each of the past five years and is a stock that long-term investors won’t need to worry about.
Walgreens Boots Alliance (WBA)
Next on the list is Walgreens Boots Alliance Inc
NASDAQ: WBA, another consumer staples stock. The company is a pharmacy-led health and beauty retail company and operates over 9,000 stores in the US under the Walgreens and Duane Reade brands. Similar to Kellogg, the Walgreens Boots Alliance does well regardless of where the economy stands. WBA is inflation-proof and it’s also a good way to get exposure to the retail and health industries.
Again, like Kellogg, Walgreens has a steady cash flow which enables it to pay a sustainable dividend. Their dividend yield is 3.67%, higher than the average for the consumer retailing industry which stands at 1.6% and also places Walgreens near the top dividend payers in the US overall. Like Verizon and Kellogg, Walgreens has also raised its dividend every year for the last 10 years. Their payout ratio is 72% this year, but it’s expected to drop down to 38% next year. That’s because Walgreens experienced a drop in earnings during the lockdown, but their operating and free cash flow remained the same meaning that there are no problems with the business. That’s also why they are expected to increase their earnings by 22% annually over the next three years. Right now, they trade at a good price. Their PE ratio is 22.59 compared to the industry average of 16.7, but their forward PE is 9.2 which is good. They are valued at $54.86 by TipRanks and so again there is a bullish case for a jump in price. Overall, Walgreens is a low-risk high-paying dividend stock.
STAG Industrial (STAG) and Medical Properties Trust (MPW)
My final two dividend stocks are STAG Industrial and the Medical Properties Trust. Both are real estate investment trusts, abbreviated as REITs. STAG Industrial focuses on acquiring and operating single-tenant industrial properties whereas the Medical Properties Trust acquires and develops net-leased hospital facilities. I like these two for several reasons. First, they’ve got an excellent dividend. STAG has a dividend of 3.05% whereas the Medical Properties Trust has a solid 4.77% dividend yield!
The average dividend for REITs is about 2.9% so both of these offer solid dividends. Again, similar to the other three companies before, both STAG and the Medical Properties Trust have raised their dividend numerous times. Plus, they have never suspended or lowered it. They boast a high payout ratio with 68% to 79% for STAG and 65% to 70% for the Medical Properties Trust, but a high payout ratio is typical for REITs. Paying dividends is really what a REIT is required to do so that’s not surprising. Plus, both STAG and the Medical Properties Trust have a high level of occupancy which means that we can expect sustainable earnings and therefore sustainable dividends from them.
However, there is another reason why I like these two. Inflation is on everybody’s mind right now and buying real estate is the perfect hedge against inflation because real estate tends to go up in price during inflationary periods. REITs allow you to buy real estate without having to dish out money for a mortgage and tying yourself down for 20 years! It means that you can benefit from rising real estate prices, which is a key principle of owning REITs. With STAG and the Medical Properties Trust you will not only be getting an amazing dividend stock, but you will also be protecting your portfolio from inflation. Win-Win.