The novel coronavirus pandemic, lockdown, recession and unemployment dominated the headlines for fiscal year 2020. It goes without saying that the year has been stressful. Holiday spending on shopping, trips or other sources of entertainment would be the best stress buster. But it also involves making your wallet light. So, it’s a good time to consider exposure to some dividend stocks that can help offset your holiday spending bill.
This article will discuss four dividend stocks that are worth considering. These stocks all pay quarterly dividends and can boost your bank balance.
In addition to having quality dividends, I have also focused on them because they are attractively valued. If these names trend higher in the next few months, investors can enjoy dividend and capital gains.
Let’s discuss the following four dividend stocks:
- Lockheed Martin (NYSE:LMT)
- The Procter & Gamble Company (NYSE:PG)
- Altria Group (NYSE:MO)
- AT&T (NYSE:T)
Dividend Stocks: Lockheed Martin (LMT)
Lockheed Martin is among my top choices for dividend stocks. The stock currently has an annual dividend payout of $10.40 and a dividend yield of 2.91%. In addition, the defense sector has been an underperformer. LMT stock has declined by more than 8% in the last year. At a forward price-to-earnings (P/E) ratio of 13.68, the stock is an attractive buy, particularly at a time when broad market valuations are looking expensive.
Another reason to like LMT stock is the sector trend. The defense sector has continued to witness order inflow even amid a slowdown. To underscore my view, Lockheed Martin reported a ninth consecutive quarter of record order backlog. As of Q3 2020, the company’s order backlog exceeded $150 billion.
From a dividend perspective, Lockheed Martin is on track for an annualized operating cash flow (OCF) of $8.5 billion. Given the order book, I expect OCF to remain strong in the coming year. Therefore, dividends are sustainable.
Another reason to like Lockheed Martin is the fact that the company is increasingly winning orders from other countries. This is a key reason to expect the order book strength to sustain.
Overall, LMT stock is worth holding for income investors. In addition, I also expect the stock to move higher in fiscal year 2021 after underperforming through the current year.
The Procter & Gamble Company (PG)
Over the decades, Procter & Gamble has been a dividend aristocrat. The company has increased dividends for 63 consecutive years. Therefore, the stock is among the top dividend stocks, with a current annual dividend of $3.16 and a dividend yield of 2.31%.
Even from a growth perspective, Procter & Gamble has delivered. For the first quarter of 2021, the company reported organic sales growth of 9%. This was driven by volume, pricing and favorable product mix. For the full year, the company has guided for organic sales growth of 4% to 5%. Even if long-term growth is in this range, dividends will continue to increase.
It’s worth noting that the company’s organic sales growth in the healthcare segment was 12%. Growth was positively impacted by the acquisition of Merck’s (NYSE:MRK) consumer health business. In addition, the novel coronavirus pandemic triggered growth for the wellness segment. I remain bullish on the healthcare and hygiene division, as the impact of the pandemic is likely to be long-lasting.
Another point to note is that Procter & Gamble has a growing presence in Asia Pacific and Latin America. These regions are likely to serve as top-line-growth and earnings-growth drivers in the next decade. Overall, PG stock is a must-buy for income investors. In addition, I expect the stock to gradually trend higher as it has done in the last one year.
Altria Group (MO)
There are two big reasons to consider Altria Group for your portfolio. First, it has a current dividend payout of $3.44 and an attractive dividend yield of 8.16%. Second, the stock trades at a forward P/E of 9.35. At a time when the S&P 500 index is trading at a P/E of 37.3, I would not hesitate in buying a bag of MO stock.
Are dividends sustainable? Absolutely.
Even with the company being in a business-transformation stage, the operating cash flow for the first nine months of fiscal year 2020 was $5.8 billion. The company has the room to increase dividends, even if growth is sluggish.
I also expect the business transformation to yield results. This includes sustainable growth in non-combustible product sales (including oral tobacco products). Once growth gains traction, MO stock will garner a higher valuation.
And as the earnings-growth rate increases, dividend investors will have a reason to rejoice. Altria has a dividend target payout ratio of approximately 80% of adjusted diluted earnings per share.
In addition to being a quality dividend stock, MO fits in with a typical Warren Buffett investment idea: Invest in companies with depressed valuations that will continue to grow at a steady pace and generate strong cash flows.
As a final note on Altria, I want to add that the pandemic has not impacted the cigarette industry. On the contrary, Americans have been smoking more during the pandemic. Therefore, with core business strength, it makes sense to hold this dividend stock.
Finally, AT&T rounds out my list of dividend stocks. Currently, T stock has an annual dividend of $2.08 and an attractive dividend yield of 6.8%. Given the fact that broad market valuations are expensive, my focus is also on value stock. The stock currently trades at an attractive forward P/E of 9.76.
Since dividends are the theme, I will start with cash flows. For the current year, the company expects free cash flow of $26 billion. This positions the company for dividend growth and deleveraging.
The last quarter was also encouraging for the company in terms of wireless and fiber broadband-subscriber growth. AT&T already has strong 5G coverage in the U.S. As 5G adoption increases, I expect growth in average revenue per user and cash flow upside.
Of course, there are other growth drivers for the company. HBO and HBO Max domestic subscriptions have topped 38 million. Worldwide, the subscriptions are at 57 million as of Q3 2020. Recently, it was also reported that AT&T has received “bids for its DirecTV unit valuing the satellite-TV service at more than $15 billion including debt.”
A deal is likely to be reached early next year. Deleveraging through this deal will be a definite upside trigger. I therefore expect the stock to move higher from depressed levels in fiscal year 2021.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.