It’s been a volatile couple of weeks in the stock market. However, quality dividend stocks have provided investors with a semblance of certainty.
While there are several companies that pay dividends, you need to identify stocks that have an attractive yield with a low payout ratio and stable cash flows.
Here we look at four such companies that should be on the radar of income investors.
A telecom heavyweight
A large-cap company that has a recession-proof business model is telecom behemoth Verizon (VZ). The company has a forward yield of 4.4% and it has now raised dividends for 14 consecutive years, including the 2% growth in 2020, amid the pandemic.
In the third quarter of 2020, the company reported sales of $31.5 billion, a fall of 4% year-over-year. Comparatively, net income declined 16% to $4.5 billion in the September quarter.
Verizon’s Q3 sales were impacted by tepid revenue for its Media business attributed to lower ad-spending. Its consumer segment also experienced a fall in sales during Q3.
However, its free cash flow was up by almost $4 billion or 27% at $18.3 billion, indicating a sustainable payout ratio of approximately 53% in the last four quarters.
Last month Verizon launched its 5G mobile service in the U.S. covering 200 million people in the country. The transition to 5G technology will be a key revenue driver in the upcoming years.
A pipeline giant
The first dividend stock on the list is Kinder Morgan (KMI), a midstream energy company that owns and operates over 38,000 miles of pipelines and 180 terminals across North America. While midstream companies do not produce oil and other natural gases, their stock prices have significantly declined due to overall weakness in the energy space.
Kinder Morgan stock is down 44% year-to-date which means it has a juicy forward yield of 8.83%. In 2020, the company has already generated $1.47 per share in distributable cash flow. This is the amount of cash that is available to the company to pay for dividends, capital expenditure, as well as lowering its debt burden.
Comparatively, the company has paid dividends of $0.7875 per share in 2020 which means its payout ratio is less than 55%, making a dividend cut highly unlikely. In the third quarter, the company’s DCF stood at $0.48 per share compared to its dividend of $0.2625 per share.
In the last three years, Kinder Morgan has focused heavily on reducing capital expenditures helping it grow cash flows. This in turn has allowed KMI to double its dividend payout since 2017.
Earlier this year, the company forecast its EBITDA to fall by 9% and DCF to decline 11% year-over-year in 2020. In Q3, the company’s EBITDA was down 7% while DCF declined by 4%.
Kinder Morgan generates around 90% of cash flow from take-or-pay contracts which makes it relatively immune to commodity prices. These are long-term contracts enabling the company to generate a predictable stream of cash flows across business cycles.
Alternatively, the shift towards renewable energy will reduce the demand and consumption of natural gas in the upcoming decades.
Brookfield Infrastructure Partners
Shares of Brookfield Infrastructure Partners (BIP) have fallen close to 13% in 2020 to trade at $43.65 per share. This indicates the stock has a forward yield of 4.5% which more than double the yield of the S&P 500.
A high-yielding stock should be closely watched as it generally implies higher risk. However, BIP can be considered an exception as it has a recession-proof business model that is well diversified to withstand economic downturns.
Brookfield Infrastructure Partners owns and operates energy, transport, and data infrastructure businesses in North America, Asia Pacific, and Europe, Its utilities business operates 2,000 kilometers of natural gas transportation pipelines, 2,200 km of electricity transmission lines, and 6.7 million electricity and natural gas connections.
Its transport business offers transportation and storage services for freight, and bulk commodities via a network of 10,300 km of rails, over 4,000 km of roads, and 37 port terminals. Similar to Kinder Morgan, BIP’s energy segment offers natural gas midstream and storage services through a network of 16,500 km of transmission pipelines.
These durable businesses coupled with a robust financial profile and stable cash flows, make BIP a top dividend stock to buy and hold over the long-term. Further, the company forecasts to grow dividends between 5% and 9% annually for the foreseeable future.
Since 2009, BIP has increased dividends at an annual rate of 11%, making it one of the top dividend growth stocks in the market.
A networking leader
The final stock on the list is the leading networking company Cisco (CSCO). This large-cap tech stock was all the rage during the dot-com bubble when it was also the largest company in the U.S. in terms of market cap. However, Cisco has since been struggling and has in fact slumped 36% in the last 20 years.
Comparatively, it has been more or less steady in the last decade returning 55% since November 2010 but easily trailing the broader markets. Cisco stock is one of the top dividend players in the tech space with a forward yield of 4%.
Over the last few years, Cisco has tried to move towards a subscription-based model which will help it generate stable revenue across business cycles. In fiscal 2020, the company generated over 50% of sales from software and services subscriptions.
The company leads several networking markets and has a huge presence in high growth verticals including collaboration and cybersecurity. At a forward price to earnings multiple of less than 13, Cisco is also reasonably valued given its earnings growth estimates of 7% and a tasty dividend yield.
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VZ shares were trading at $58.14 per share on Tuesday morning, up $0.44 (+0.76%). Year-to-date, VZ has declined -1.17%, versus a 6.37% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist.4 High-Yield Dividend Stocks to Buy in November appeared first on StockNews.com