3 Dividend Stocks for the Second Half of the Year

Here's why income investors should be looking at Cisco, IBM, and Kinder Morgan now.

Tim Brugger
Tim Brugger, Keith Noonan, and Matthew DiLallo
Jun 10, 2017 at 2:23PM
Technology and Telecom

In addition to sharing relatively depressed values after a tepid opening half to 2017, Cisco Systems (NASDAQ:CSCO), IBM (NYSE:IBM), and Kinder Morgan (NYSE:KMI) have something else in common: Each pays a solid dividend, particularly when compared with many of their peers. Will any of the aforementioned stocks soar this year? Not likely -- but all can provide income investors with plenty of upside along with their strong payouts.

Drawing of outstretched hands holding money.

Image source: Getty Images.

Some things are worth the wait

Tim Brugger (Cisco): There were a lot of things to like -- and some things not to -- in Cisco's recent fiscal third-quarter earnings report. But as they have for much of the year, the bears had their way with its stock, which took a 5% nosedive after the results were shared. To my mind, though, that's just another reason this dividend stock is worth a look in the second half of the year.

On the upside, Cisco's $11.9 billion in revenue was better than expected, and down a mere 1% year over year.  Another tidbit worth mentioning is that CEO Chuck Robbins' transition of the company to a recurring-revenue model (and the relatively stable, predictable foundation it brings) took another step in the right direction. Last quarter, 31% of total sales were recurring, driven largely by subscription-based and software offerings. Deferred revenue soared 13% to $17.3 billion, a sign of a healthy backlog of business.

A number of acquisitions last quarter, including deals for artificial-intelligence specialist MindMeld and Saggezza's advanced-analytics unit, should give Cisco's Internet of Things and big data efforts a boost. Its deal for AppDynamics also closed in the third quarter, which is right in line with Cisco's cloud plans.

The "problem" in the report was guidance for the current quarter of a 4% to 6% decline in sales. However, excluding one-time items, per-share earnings should be a bit higher than a year ago. Cisco's multiple growth opportunities, combined with a 3.65% dividend yield, one of the industry's best, make it an excellent alternative for the rest of this year, and many more to follow.

Stack big dividends with Big Blue

Keith Noonan (IBM): With a depressed valuation and one of the best dividend profiles in the tech sector, IBM looks to be a top stock to buy for the second half of the year. The company has a forward P/E value of just 11, and its potential for a comeback, thanks to initiatives including artificial intelligence and cloud services, means there are compelling reasons to stake a position in Big Blue beyond its considerable appeal as an income generator.

Withering demand for the company's legacy hardware and software offerings has led to a 20-quarter streak of declining revenues and helps explain its weak stock performance. But combined sales from its cloud, Watson, security, and mobile businesses are showing solid momentum -- growing 12% year over year last quarter to constitute 42% of overall revenue. These businesses, which fall under the company's "strategic imperatives" banner, generate better margins than its waning legacy segments do, and the company expects that they will help drive a return to earnings growth this year.

Of course, the stock's returned-income component also deserves attention. IBM has a 22-year history of annual payout increases, and with its payout ratio sitting at roughly 44%, the company also looks to be in good position to continue boosting its dividend. Big Blue's payout growth has also been substantial, with 14% average annual growth over the past five years and 16.3% average annual growth over the past decade -- a good sign that investors can continue to expect significant payout increases down the line. Given that IBM is already yielding roughly 3.9%, that's an attractive prospect and further indication that it's a stock that income-focused investors should consider adding to their portfolios.

Getting ready for a reset

Matt DiLallo (Kinder Morgan): When energy infrastructure giant Kinder Morgan put out its financial expectations for 2017 late last year, it said it was getting closer to the pivot point where it would start generating more cash flow than it needed to invest back in the business. While the company noted that it had several options about what to do with that excess cash, it said it would probably divert a "significant portion" to boosting its dividend. But because the company still had several strategic initiatives to work through at the time, it wouldn't release its revised dividend policy until the latter half of 2017.

Since that time, the company has gone on to complete a joint venture to raise capital for one large project and held an IPO for its Canadian business to secure cash for another major project. As a result, Kinder Morgan has completed all the tasks it set out for itself for the year, which makes it all the more likely that it will raise its payout later this year.

According to some analysts, that dividend increase could be significant, with many suggesting that the company could double its payout next year. Such an increase would only consume about 50% of the company's annual cash flow, putting it on par with the payout ratios of fellow energy infrastructure giants TransCanada and Enbridge and leaving it with plenty of excess cash flow to invest in growth projects.

With the growing likelihood of a substantial dividend increase on the horizon, this looks like an excellent time to buy Kinder Morgan.