[Editor’s note: “5 Stable Dividend Stocks to Buy as Fixed Income Vanishes” was previously published in January 2020. It has since been updated to include the most relevant information available.]
Income in the bond market is rapidly disappearing, and that’s a weird concept to try and wrap your head around.
For decades — centuries, even — investors around the world have bought fixed-income instruments for relatively risk-free income. The concept is simple. You give money to a government or corporate entity who turns around and pays you interest for lending that money to compensate for risk and time.
But this simple concept has been flipped on its head recently. Specifically, the “interest” part of the above fixed-income equation has gone out the window. Consider the following:
- The 10-year Treasury yield is around 0.63%.
- The 30-year Treasury yield has plunged to all-time lows around 1.3%.
In other words, across the world, the income part of the fixed-income equation is rapidly disappearing. Weird, right?
Despite this, U.S. equities are still giving investors income. That is, the S&P 500‘s dividend yield presently hovers around 2% — significantly above all-time low levels (roughly 1% in 2000) and also on the upper end of where the S&P 500 dividend yield has hovered over the past 20 years.
Big picture, then, while the fixed income market is suffering from disappearing income, some stocks are still paying good income.
The implication? Buy stable dividend stocks that pay more than any other relatively risk-free bond in the world will. As investors grow tired of not even beating inflation by buying a 10-year Treasury note, they will inevitably pile into stocks which: 1) have much higher yields, and 2) have a history of steady and consistent dividend hikes.
Without further ado, let’s take a look at five dividend stocks that fit this description.
Dividend Yield: 7.28%
Dividend History: The dividend has consistently increased over the past 34 years.
At the top of this list, we have a stock that many consider the blue-chip dividend king: telecom giant AT&T (NYSE:T).
AT&T has everything investors are looking for in a stable, income-paying stock. Big yield? Check. The stock yields 5.37%. History of dividend hikes? Check. AT&T has consistently hiked its dividend over the past three decades.
Stable operations? Check. AT&T provides telecom services that U.S. consumers have become exceptionally dependent on — indeed, the internet and wireless services which AT&T provides may be the most important utilities outside of water, food and electricity. Healthy catalysts on the horizon? Also, check.
AT&T’s streaming services should help offset cord-cutting weakness, and the company benefits from the mainstream and widespread deployment of 5G infrastructure and devices.
AT&T stock is the quintessential stable dividend stock to buy at the current moment.
American Electric Power (AEP)
Dividend Yield: 3.59%
Dividend History: The dividend has consistently increased over the past six years.
Next up, we have a utility giant that is best known for its stability and resiliency: electricity services provider American Electric Power (NYSE:AEP).
Relative to other “big dividend stocks,” AEP’s yield isn’t that big. It sits at just 2.98%. But, there are three things to note here.
First, that yield still smashes the 10-year Treasury yield.
Second, American Electric Power has a long track record of consistent dividend hikes that dates back at least six years, a stretch during which the dividend increased 100%.
Third, American Electric Power has an equally long track record of consistent and stable revenue and profit growth, which has powered consistent gains in AEP stock over the past decade.
As such, what AEP lacks in yield, it makes up for in operational consistency and stability. Consequently, the best way to look at AEP stock is as the best “stable” stock to buy. It just so happens to yield almost 3%, too, which is an added bonus.
Dividend Yield: 3.26%
Dividend History: The dividend has consistently increased over the past eight years.
Third, we have a global chip giant that appears to be on the verge of finding its winning stride again — Qualcomm (NASDAQ:QCOM).
Unlike AT&T and American Electric Power, Qualcomm is not traditionally seen as an icon of stability. Just look at a five-year chart of QCOM stock to see why. But, most of the turbulence in QCOM stock over the past five years has been driven by operational noise, namely, a big legal battle with their largest customer, Apple (NASDAQ:AAPL). That legal battle is now over, and it ended in a favorable outcome for Qualcomm.
Consequently, looking in the rear-view mirror here is the wrong way to look at QCOM stock. It’s not about what has happened. It’s about what will happen. What will happen is good stuff. Qualcomm has locked in Apple as a customer for the next several years.
At the same time, 5G phones are launching next year, and it appears pretty much every smartphone provider is leaning into Qualcomm to provide the infrastructure for those 5G phones. As such, Qualcomm will find itself as a big beneficiary of the 5G tailwind. This tailwind should last for several years, meaning that Qualcomm should be in winning stride for the foreseeable future.
Ahead of the company regaining its winning stride, the stock still yields an impressive 2.75%. Thus, not only does QCOM stock have a compelling multi-year bull thesis, but the stock is also paying investors to buy into that compelling bull thesis. It’s a win-win situation that ultimately gives QCOM the nod as a stable dividend stock to buy here and now.
Dividend Yield: 3.21%
Dividend History: CVS last increased its dividend payout in 2017.
Fourth, we have an undervalued, stable stock that is in the midst of a potentially huge breakout — retail pharmacy giant CVS (NYSE:CVS).
It’s been a rough few years for CVS stock. On the retail pharmacy side, increased competition has simultaneously pressured current sales trends and depressed investor sentiment regarding future sales trends. On the pharmacy benefit manager side, legislation has similarly pressured sales and profits.
Consequently, by mid-2019, CVS stock had dropped to $50 — the stock’s lowest level since early 2013 — and was trading at under 8x forward earnings.
Since then, retail sales trends have improved as CVS has refreshed stores and expanded omnichannel capabilities to overstep the competition. Such improvements should persist as the company expands a local healthcare program which has the potential to dramatically improve core operational performance trends.
At the same time, the White House has scrapped a bill that would’ve been disastrous for PBMs. And now the outlook on that side of the business is also improving significantly.
In response to these positive developments, CVS stock has rallied well past $70 since it’s mid-2019 plunge. This rally is just getting started. The stock is still cheap, the yield is still big, the outlook is still improving and the upward momentum is very real. As such, CVS stock appears to be in the first few innings of a huge breakout.
Dividend History: The dividend has consistently increased over the past 51 years.
Last, but not least, we have a blue-chip retail giant that is absolutely on fire today: Target (NYSE:TGT).
The story at Target is pretty simple. A few years back, the mainstream emergence and adoption of e-commerce caused a traffic exodus out of Target stores. For a short period of time, Target struggled. Then, Target adapted. It built out a big e-commerce operation, refreshed stores to be more tech-savvy, built out omnichannel capabilities, expanded in-store and online offerings and much more.
In a nutshell, Target became the quintessential, modern omnichannel retailer that leveraged technology to optimize customer convenience in every way possible.
It worked. Over the past few years, Target has fired off its best numbers in a decade. We are talking decade-best sales growth, comparable sales growth, online sales growth and traffic growth. At the same time, margins have been largely stable, so profit growth has been equally robust. TGT stock has naturally rallied big in response to this operational excellence.
This rally is far from over. Target has optimally positioned itself so that — so long as the U.S. consumer remains healthy — Target will continue to report impressive numbers. The stock isn’t terribly expensive at all (17-times forward earnings), the yield remains big (2.12%) and TGT stock has very healthy upward momentum.
TGT stock is a stable dividend stock that should stay in rally mode for the foreseeable future.
As of this writing, Luke Lango was long T, QCOM, and CVS.