Dividends are periodic payments a company makes to shareholders out of the profits it generates, provided it has a dividend policy. They assure a stable, steady stream of returns to shareholders — unlike capital gains, which are subject to fluctuations triggered by company-specific and extraneous factors.
The coronavirus pandemic and its impact on companies has put this steady stream of income at risk.
Unable to cough up cash to meet dividend payments at a time when businesses are reeling to keep operations going, several companies have announced suspension of dividends or pauses of stock buybacks.
Dividends In Value Vs. Growth Investing
To compare the returns of a stock, a metric called dividend yield is used. Dividend yield is the amount of dividend paid by a company for a year, divided by its current stock price and expressed in percentage terms.
Value stocks — stocks that are trading at a lower price relative to their fundamentals — invariably have a higher dividend yield. Most value stocks belong to mature companies that can afford to pay dividends due to their strong cash flows.
Unlike value stocks, growth stocks are mostly up-and-coming companies that do not have the luxury of steady cash flows to fund dividend payouts. Even if their cash flows support payouts, they would often rather invest in growth opportunities than on dividends. Investors in these companies rely on capital gains or share price appreciation to realize returns.
Due to the high P/E ratios of these companies, their dividend payouts tend to be lower.
Dividend Plays In Favor Amid Pandemic Uncertainty
The pandemic that has cut across continents has dimmed the outlook for economy. Goldman Sachs recently lowered its U.S. GDP forecast for the first quarter to zero and for the second quarter to negative 5%.
The labor market is in doldrums. First-time claims for unemployment benefits in the U.S. shot up to a staggering 3.283 million in the week ended March 21, with the previous record set in October 1982 reading only 695,000, according to a report from the Department of Labor.
The data underlines the severity of the pcrisis. Most economists expect incremental doses of negative news in the coming weeks and months.
"People can't go to work, people can't go shopping, and large sections of the economy (airlines, hotels, restaurants, and most retail stores) have simply shut down," said Brad McMillan, chief investment officer at Commonwealth Financial Network.
"These are the direct job losses that are now showing up. Over time, they will be followed by the indirect jobs losses in companies that support these companies. It will be a long process."
Personal incomes have taken a hit due to layoffs.
Against this backdrop, Investing in safe, stable dividend stocks could help to some extent to augment dwindling finances until the economy recovers.
Safe Dividend Plays To Keep An Eye On
To screen safe dividend stocks, Benzinga used the following filters:
- Dividend yield greater than 5% (data taken from Google)
- S&P 500 companies
- Those that haven't already announced a dividend cut
- Those that are relatively immune to the ongoing turmoil and therefore likely to leave dividends unscathed
1. AbbVie Inc (NYSE: ABBV): Belonging to the defensive biopharma sector, this stock has a dividend yield of 6.3%.
2. H & R Block Inc (NYSE: HRB): This tax preparation company's dividend yield is 7.27% and is considered relatively safe.
3. IBM (NYSE: IBM): This tech conglomerate generated cash flow of $11.9 billion in 2019 and paid out about $5.7 billion in dividends. The dividend yield of 5.82% is therefore considered stable.
4. Altria Group Inc (NYSE: MO) has a dividend yield of 9%. This tobacco maker is well-positioned to weather any volume-related setbacks, thanks to its premium products. Its investment in pot company Cronos Group Inc (NASDAQ: CRON) could provide additional cushion.
5. Philip Morris International Inc. (NYSE: PM): Altria's peer Philip Morris, with a dividend yield of 6.49%, is also considered a safe bet as far as dividends are concerned. Its dividend coverage ratio — a measure of how many times dividends are covered by earnings — is fairly high.
6. AT&T Inc. (NYSE: T): The telecom giant has a dividend yield of 6.93% and has the distinction of raising its dividend for 35 straight years.
7. Molson Coors Beverage Co (NYSE: TAP): This brewer offers a dividend yield of 5.75%. The company withdrew its financial guidance last week, although it did not hint at any plans to suspend shareholder returns. The recent quarterly report revealed free cash flow of about $1.4 billion.
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