In a world where investors struggle to earn decent returns from fixed-income instruments, dividend stocks have emerged as a strategy for earning higher returns. The average dividend yield for the S&P 500 is just over 1.9%, dramatically higher than the 0.09% investors earn in a savings account on average.
Moreover, the stock market offers stocks that not only produce dividend yields that significantly exceed that average, but they also provide the income or cash flow that will allow them to maintain or increase dividends over time. Here are five stocks in five different industries that fit that description.
1. AbbVie
AbbVie (ABBV -0.66%) stock sold off in recent years due to the impending patent expiration of its primary revenue driver, Humira. As it began to recover amid new drug developments, the announcement of its purchase of Allergan initially weighed further on the stock.
However, AbbVie looks positioned to move on from Humira. Two hematologic oncology drugs, Imbruvica and Venclexta, together registered 37% in reported revenue growth year over year. Humira saw no net increase over the same period.
Image source: Getty Images.
Moreover, AbbVie has shown signs of recovery in recent months. Despite this increase, AbbVie stock trades at a forward P/E ratio of around 8.7. This occurred despite the fact that analysts forecast earnings increases of 8.3% this year and 8.7% in fiscal 2021.
Furthermore, due to its history as a subsidiary of Abbott Laboratories, it has now benefited from 47 consecutive years of payout hikes. This year's annual payout of $4.72 per share yields around 5.3%.
The company should be able to easily maintain this dividend. The dividend payout ratio stands at about 48.8%, and cash flow has consistently come in well above the cost of paying the dividend. Moreover, Dividend Aristocrats such as AbbVie tend to continue dividend hikes unless the company's financial condition makes payout hikes untenable. As sales of its hematologic oncology drugs continue to grow, investors could find it hard to pass up on this growth and income play.
2. AT&T
AT&T (T -0.44%) struggled for much of the decade as wireless competition and cord-cutting cut into the telecom giant's profits. On top of that, the cost of building out a 5G network weighed on the company. Also, acquisitions such as DirecTV and the division now known as WarnerMedia placed further pressure on AT&T's balance sheet.
The company's dividend is another significant cost. In 2019, dividend payments set the company back $14.888 billion. The yearly payout has since risen from $2.04 to $2.08 per share.
However, AT&T is also a Dividend Aristocrat, and the company probably wants to avoid the pain of ending the 35-year streak of payout hikes. Hence, even at a yield of around 5.8%, the dividend will likely keep rising. Furthermore, at a payout ratio of about 57.6%, AT&T can probably continue to fund the dividend.
To be sure, the profit growth rate of 1.1% forecasted for the year will likely not inspire investors. However, profit growth should improve, and once 5G takes off, AT&T will be one of only three companies providing this next-generation service in the United States. Furthermore, with a forward P/E ratio of around 9.9, investors can pick this stock up at a relative bargain.
3. Altria
Altria (MO -0.42%) continues to defy odds. The Surgeon General's report that warned of the dangers of smoking came out more than 56 years ago. At that time, around 42% of Americans smoked cigarettes.
That number fell to 15.5% by 2016. Nonetheless, both Altria stock and its dividend continued to rise amid the smoking decline. In January 1964, Altria traded at a split-adjusted level of about $0.13 per share. The stock has since seen seven stock splits and numerous dividend increases. The current $3.36 per share annual dividend yields around 8.3% and has risen for 11 consecutive years.
Further, even with the massive increases, Altria sells for only about 9.2 times forward earnings. While the payout ratio of around 75.8% may appear elevated, earnings growth of 5% for the current year should be enough to keep the high payout and the subsequent increases coming.
Altria continues to face challenges. Declines in smoking could still hurt the company's growth. Also, the SEC probe of the JUUL acquisition could weigh on Altria stock for now. However, Altria has invested $1.8 billion in Canadian marijuana giant Cronos Group. As more jurisdictions legalize cannabis for both medical and recreational purposes, this investment could eventually drive earnings growth for Altria stock.
4. ExxonMobil
ExxonMobil's (XOM -0.01%) yearly dividend of $3.48 per share, or 6.75%, seems impressive. However, a slowdown in China related to the coronavirus has reduced overall energy consumption. This caused ExxonMobil stock to drop by nearly 27% in the first two months of 2020.
Still, some seem to forget that ExxonMobil is a diversified energy play. Yes, its upstream segment deals with volatility as fluctuating oil prices often make or break the profitability of drilling projects. However, the company also refines and sells petroleum products and chemicals, a relatively steady business regardless of oil prices.
Moreover, for all of the focus on renewables, electric vehicles only made up 1.8% of all vehicle sales in March 2019. Hence, investors can safely assume that fossil fuels are not going anywhere.
Nonetheless, ExxonMobil now trades at a forward P/E ratio of around 14. With five-year profit growth projections averaging 5.65% per year, the dividend is arguably the primary motivation to buy Exxon stock now.
More importantly, ExxonMobil has maintained a 37-year streak of consecutive annual payout hikes. This means the dividend rose in both high and low-oil-price environments. It also means that dividends increased when the payout ratio reached 108.9%, as it has now. Free cash flow fell well below the dividend expense in 2019. Still, even if prices remain depressed, both divestitures and new ventures could fund annual payout hikes for the foreseeable future.
5. PennyMac Mortgage Investment Trust
PennyMac Mortgage Investment Trust (PMT -0.40%) specializes in mortgage-related assets, particularly on the residential side. As a real estate investment trust, it must pay out at least 90% of its net income in the form of dividends to avoid most income taxes.
PennyMac is not a household name among stocks. However, the payout could compensate for a lack of name recognition. Current shareholders receive an annual payout of $1.88 per share, a yield of around 8.75%.
Moreover, given the previously mentioned 90% payout requirement, the dividend payout ratio of about 84.5% appears slightly low. Also, in 2019, it generated almost $201.42 million in net income attributable to common shareholders, more than enough to cover the required dividend payments.
Furthermore, in addition to the dividend, PennyMac stock trades at a reasonable valuation. It sells for just over 10.1 times forward earnings. The average annual earnings growth rate of 4.15% may not excite investors. Still, given its dividend, investors will more than likely buy PennyMac primarily for its payout, which has remained steady since 2015. Moreover, as income rises, payouts will have to rise for the company to maintain its REIT status.
