In normal times, we contrarians are stuck combing the market’s backwaters in our hunt for outsized dividends. But now we can get the same big payouts but with much less work, notes income expert Brett Owens, editor of Contrarian Outlook.
In fact, we can get them from the same stocks you’ll find in any American’s portfolio! This is a once-in-a-generation opportunity, and it can’t last.
AT&T (T) doesn’t offer strong payout growth. But if AT&T has been on your watch list, now is the best time to buy that we’ve seen in years.
The dividend accounts for 55% of AT&T’s last 12 months of FCF, a reasonable ratio for an essential-service provider, and that isn’t the only thing protecting the payout: the company ended the first quarter with $10 billion in cash, far more than the $3.7 billion it pays in quarterly dividends.
Net debt was also a reasonable 27% of assets, and AT&T will bring in $2 billion from property sales later this year. These moves should see AT&T through the crisis. On the other side, it will benefit from its 5G rollout and the work-from-home trend, which will only accelerate.
MetLife (MET) has been unduly punished this year, dropping 30% to trade at just 44% of book value. Buying now also gets you a 5.6% yield, way up from the 3.6% average for all of 2019.
The payout is also easily protected by MET’s low payout ratio, at just 12% of FCF. Its balance sheet also shines, with $20.5 billion of cash, more than its $16.9 billion of long-term debt. If you’re looking to bolster your financial holdings while going beyond banks , MetLife is worth a look.
One stock likely to raise its dividend this year is International Business Machines (IBM). The company has raised its dividend for 24 straight years, so it has one hike to go before becoming a Dividend Aristocrat.
IBM’s reasonable free cash flow payout ratio of 50.5% should help it over the line, as should its healthy balance sheet, with reasonable debt and $11.2 billion of cash on hand as of the end of the Q1, well above the $1.4 billion of dividends it paid in the quarter.
Unfortunately, IBM’s revenue has tracked the wrong way in the last decade, and that’s pulled the share price down with it. The company is making progress in some areas, like the cloud (sales up 23% in the first quarter).
But it still lags in this market, well behind Amazon (AMZN) and Microsoft (MSFT). Even so, if you want to bet on a comeback for Big Blue, you can buy this soon-to-be Aristocrat at a higher-than-average yield now.
