These 2 Dividend Stocks Are Worth a Look

There's been a lot for investors to like about market performance over the last decade, but there's a flip side: In a market that climbs to new heights, equities tend to be more expensive. No one is able to consistently predict what the broader market will do, but it's possible to make adjustments to your holdings that can help you minimize risk.

Stocks that pay regular, healthy dividends have historically tended to outperform those that don't, and can both provide a buffer during periods of volatility and help build a sizable income base for long-term shareholders. With that in mind, here's a look at AT&T (NYSE: T) and IBM (NYSE: IBM), two companies generating strong free cash flow (FCF) and distributing generous payouts.

Stacks of coins in front of a bar chart with trees growing out of the four largest stacks.
Stacks of coins in front of a bar chart with trees growing out of the four largest stacks.

Image source: Getty Images.

Where AT&T is

When it comes to returning big value to shareholders and regularly increasing its dividend payout, few companies have a better track record than AT&T. The telecom giant has delivered an annual dividend raise for 34 years running. Things look pretty good on the cash flow side of thing, as well. Last year the company recorded roughly $17.6 billion in FCF, and this year it's guiding for a whopping $21 billion in FCF.

The telecom giant has recently become a leader in the entertainment space thanks to its successful acquisition of Time Warner. Rather than spur a stock rally, the approval of the deal has been followed by a roughly 7% decline in the stock's value. The sell-off is likely tied to concerns that the merger loads the company's books with too much debt, and that this could impact its ability to maintain its dividend payout.

Those concerns are worth keeping in mind. However, AT&T management has stated that it expects the deal will actually increase its ability to cover its payout, and the 50-50 cash-and-stock buyout and obligations to its shareholders suggest substantial incentive not to cut the dividend. With the cost of distributing its current payout coming in at roughly 67% of trailing FCF and the beneficial impact of integrating Warner's business, I think AT&T should be able to continue delivering small dividend growth. Shares trade at roughly 9.5 times this year's expected earnings, and its dividend yield sits at roughly 6.3% -- the highest it's been in more than six years.

Where AT&T is going

Bringing the Time Warner assets into the corporate fold makes AT&T significantly better positioned to navigate the shifting demands of the telecom space on a variety of fronts. Crucially, it helps diversify and strengthen the company against the threat that Alphabet and Facebook will make bigger plays to become telecom providers in AT&T's key markets.

The company also looks to have big opportunities on the horizon thanks to its leadership position in the evolution of 5G network technology. 5G means much faster internet, but the new network technology's biggest impact will likely have more to do with categories like autonomous vehicles, augmented reality, and smart-city technology.

AT&T's early trials are already showing download speeds exceeding a gigabit per second in suboptimal conditions -- up from the 50-megabit-per-second rate that's a top-range performance for 4G LTE connections. And the performance could improve as the technology is developed further. Some estimates suggest that 5G download speeds could reach as high as 50 gigabits per second.

More importantly, the next generation of network technology's shorter wavelengths will be able to support a greater number of devices and dramatically reduce latency. The company's current 5G trials are delivering latency of just 9 milliseconds, down substantially from the roughly 58-millisecond high-end-performance latency on its 4G LTE network. This progression should pave the way for technologies that hinge on rapid exchanges of data, and AT&T's early leadership in the space positions it to benefit from the growth of network-and-platform services that will be at the heart of the Internet of Things revolution.

What IBM has going for it

Big Blue has recorded roughly $13.5 billion in free cash flow over the trailing 12 months, boasts a dividend yield a touch over 4.5%, and has delivered a payout increase on an annual basis for 23 years running. With the cost of distributing its current payout coming in at just 43% of its trailing free cash flow, the company shouldn't have too much trouble delivering payout growth in the future -- even if there are some bumps in the road as it orchestrates a turnaround effort.

Declines for the company's legacy hardware and services businesses have prompted overall revenue to fall roughly 20% over the last five years. Unfortunately, these are businesses that don't look poised for a sustained rebound, but I think the market is underestimating IBM's growth initiatives.

The cloud services, analytics, mobile, and security businesses that it lumps into its strategic imperatives segment have climbed 10% on a currency-adjusted basis over the trailing 12 months -- accounting for 47% of total sales over that stretch. Declines in other areas of the business have also pushed strategic imperatives' portion of revenue higher. Big Blue has a solid position and outlook in cloud services, and its established position in the enterprise information technology space gives its growth initiatives a favorable launching pad.

IBM rewarding shareholders

IBM is also carrying out a huge buyback initiative, having reduced its total shares outstanding by 16% over the last five years. That's a move that should create positive pressure for the company's earnings and ability to raise its dividend payout over the long term. Between stock repurchases and dividend payouts, the company returned $2.2 billion to shareholders in the March-ended quarter.

Negative sentiment evident in the options market and a recent report that Alibaba has passed IBM in cloud market share may be responsible for some of the recent sell-off, but there's appealing value for long-term shareholders at current pricing levels. As fellow Fool writer Timothy Green recently pointed out, IBM's dividend yield now stands at a 20-year high, and the company is valued at just 10 times this year's expected earnings. Those are metrics that could signal an appealing entry point for income-focused investors looking to build a position, settle in for the long term, and enjoy sizable payouts.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Keith Noonan owns shares of AT&T; and IBM. The Motley Fool owns shares of and recommends Alphabet (A and C shares), and Facebook. The Motley Fool has a disclosure policy.