Bond investors should consider these dividend stocks.
Yields on 10-year Treasury bonds crept higher in the weeks leading up to the election but have remained at historically low levels below 1% since March. The Federal Reserve has said it is committed to maintaining the federal funds rate at near 0% levels for several more years, leaving yield investors with limited options in the bond market. Yields on some government debt around the world have even dipped into negative territory. Many income investors are turning to the stock market for consistent, steady dividend yields. Here are seven Morningstar-recommended stocks with yields of at least 5.5%.
AT&T (ticker: T)
AT&T is the largest U.S. telecommunications company. Analyst Michael Hodel says AT&T's third-quarter results were extremely impressive, and its 645,000 net postpaid phone customer additions represented its best performance in several years. AT&T has also been aggressively promoting the Apple (AAPL) iPhone 12 and increasing the length of its iPhone contracts. AT&T has a massive amount of debt, but it is also projecting $26 billion in free cash flow in 2020. AT&T has about a 7.2% dividend. Morningstar has a "buy" rating and $37 fair value estimate for T stock.
Exxon Mobil Corp. (XOM)
Exxon Mobil is the world's largest integrated oil and gas company, and 2020 has been another difficult year for oil investors. However, the one thing Exxon investors have been able to rely on over the years is the stock's large dividend. Exxon has raised its dividend each year for the past 37 years despite periodic cyclical downturns in the oil industry. Analyst Allen Good says Exxon management appears committed to the dividend despite more losses for Exxon in the third quarter. Exxon has about a 9.5% dividend. Morningstar has a "buy" rating and $74 fair value estimate for XOM stock.
Chevron Corp. (CVX)
U.S. oil major Chevron joins Exxon as the only other energy stock that has raised its dividend for at least 25 consecutive years. Good says Chevron's upstream and downstream segments returned to profitability in the third quarter. Still, its $3.5 billion in operating cash flow wasn't enough to fully cover both $1.6 billion in capital expenditures and $2.4 billion in quarterly dividend payments. Fortunately, Good says Chevron management appears committed to its 6.3% dividend despite extremely difficult oil industry conditions. Morningstar has a "buy" rating and $111 fair value estimate for CVX stock.
China Mobile (CHL)
With nearly 1 billion mobile subscribers, China Mobile is the world's largest telecom company. Analyst Dan Baker says China Mobile has one of the strongest balance sheets of any company in the world, including $58 billion in cash, and generates plenty of cash flow to support its 5.6% dividend. In addition, Baker expects profitability to increase once the company has finished investing in 5G network infrastructure. In addition to the dividend, Baker is projecting less than 2% annual operating profit growth over the next five years. Morningstar has a "buy" rating and $52 fair value estimate for China Mobile stock.
Philip Morris International (PM)
Philip Morris International holds a roughly 28% share of the international cigarette and heated tobacco markets. Analyst Philip Gorham says the market's initial negative reaction to Philip Morris' solid third-quarter numbers demonstrates the bearish investor sentiment that the tobacco giant is facing these days. Adjusted earnings per share were up 5.6% organically last quarter, while revenue was down 1.5% year over year. Gorham says the key metric for investors to monitor is operating margin, which expanded by 1.8% last quarter. Philip Morris has about a 6.5% dividend. Morningstar has a "buy" rating and $98 fair value estimate for PM stock.
Total SE (TOT)
Total SE is a French integrated oil and gas company. Good says Total's third-quarter earnings report suggests the company is in good financial health. Total reported $1.6 billion in free cash flow, $422 million in asset sales and a 1.5% drop in net debt-to-capital ratio compared with the second quarter. Good says Total's balance sheet is one of the strongest in the energy sector as the company works toward its long-term goal of achieving net zero emissions by 2050. Total has a 7.8% dividend. Morningstar has a "buy" rating and $57 fair value estimate for TOT stock.
British American Tobacco (BTI)
Like the other oil and tobacco stocks on this list, London-based British American Tobacco is relying on its 7.5% dividend to attract income investors to businesses that many people see as secularly challenged. Gorham says there is "significant upside" to British American Tobacco at its current valuation, especially given its diversified exposure to emerging tobacco categories. Despite a challenging climate in emerging markets, British American is projecting between 1% and 3% full-year organic revenue growth and earnings growth in the mid-single-digit percent range in 2020. Morningstar has a "buy" rating and $54 fair value estimate for BTI stock.
Consider these stocks as alternatives to bonds:
-- AT&T (T)
-- Exxon Mobil Corp. (XOM)
-- Chevron Corp. (CVX)
-- China Mobile (CHL)
-- Philip Morris International (PM)
-- Total SE (TOT)
-- British American Tobacco (BTI)