There are several investing styles that can be effective, each of them requiring a certain set of skills and temperament. Dividend investing requires two crucial things: finding quality stocks that will be able to pay dividends consistently for decades, and then having the patience to wait years (decades, even) to let reinvested dividends do the heavy lifting of building wealth.
To get started on the path to wealth-building through dividend stocks, we asked three Motley Fool investors to each highlight a top-quality dividend stock. For a little bit of an additional challenge, we wanted to see companies with a dividend yield of more than 3%, better than the S&P 500's aggregate yield of 1.8% today. Here's why they picked Vodafone Group (VOD -0.96%), AT&T (T -1.20%), and Anheuser-Busch InBev (BUD -1.09%).
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A 3% dividend yield is actually pretty measly. How about we double that?
Rich Smith (Vodafone Group): When searching for a dividend stock with a big payout, American telecom stalwarts like AT&T and Verizon Communications are at the top of many investors' lists. But if you're willing to travel a bit further afield, would you believe there's an international telecom that will pay you even more -- and that sells for a more attractive price as well?
Its name is Vodafone Group, and it's one of the biggest telecom companies in Europe, pulling down revenues of $8.7 billion last year in the UK (its home market), $13.3 billion in Germany, and $13.7 billion from Spain and Italy combined. Elsewhere, Vodafone does billions of dollars a year in business in Africa, Asia, and the Middle East.
It's also a great stock for dividend investors.
Vodafone pays out almost all its profits in the form of dividend checks, and with a yield of 7%, it's a better dividend payer than either AT&T or Verizon. Although Vodafone stock looks expensive at a P/E of 25, Vodafone generates gobs of cash -- $10.7 billion in free cash flow last year. That gives it a very reasonable enterprise-value-to-free-cash-flow ratio of just 10, even after accounting for the company's $40 billion in net debt.
Between the giant dividend yield and analysts' projected 14% long-term earnings growth rate, I think Vodafone stock would make a fine addition to any dividend investor's portfolio.
A depressed telecom titan
Keith Noonan (AT&T): AT&T stock can't seem to catch a break. After the company finally gained approval for its merger with Time Warner from a federal court ruling on June 12, its stock shed roughly 7% of its value in the next week of trading. The telecom giant's valuation regained some ground in the weeks that followed, but it's once again seen significant sell-offs on recent news that the Department of Justice (DOJ) will appeal the court's ruling.
Shares are now down roughly 19% year to date and trade in the range of five-year lows, bringing the company's dividend yield to a whopping 6.3%. The market appears split on whether the Time Warner merger is the right move for AT&T, and it seems reasonably likely that the uncertainty surrounding the appeals case will sideline many investors. The DOJ's latest challenge does introduce some new risk, particularly the threat that AT&T could be on the hook for the costs needed to once again split the two companies. That said, for long-term investors seeking big dividend payouts, I think the company remains a worthwhile buy.
Completely closing the book on the Time Warner merger will work to AT&T's benefit. It will add leading film and video-game production studios and franchises to the corporate fold, and open up advertising and bundling opportunities that will significantly benefit the business. Following the District Court's June ruling and the completion of the merger, it seems likely that the deal will be upheld with the appeals decision, but AT&T will be free to pursue other acquisitions to strengthen its long-term competitive prospects.
Factor in the company's strong position in the 5G and Internet of Things platform and services markets that present big long-term opportunities, and shares look appealing at roughly nine times this year's expected earnings.
Growing its global reach in a big way
Tyler Crowe (Anheuser-Busch InBev): If you're taking a look at the beer section of your grocery store, I'm guessing the reaction you have to Anheuser-Busch's premier offerings -- Budweiser, Stella Artois, and Corona -- is a shrug of the shoulders. The North American beer market hasn't grown much, and the influx of craft brewers has been a bit of a pain point for the big brewers. If you look beyond the North American market, though, there are immense opportunities for Budweiser to capitalize on its brands.
A great example of these efforts was leveraging its corporate sponsorship of the World Cup to introduce its premier brands to several new countries, on top of the regional offerings that it already owned as part of the acquisition of SAB Miller back in 2016. Last quarter, AB InBev's revenue was up 7.9% year over year despite a 2.2% revenue decline in North America.
Its Latin America, Asia-Pacific, and Middle East & Africa segments are proving to be hotbeds of growth. And the introduction of its premium products should also help drive higher revenue and improved margins as these brands gain some traction in new markets. The growth in these markets are proving to be enough to justify the high cost it paid for the SAB Miller tie-up.
With a dividend yield of 4.1% today, it looks as if there are still some fears that AB InBev paid too much for the acquisition and is overloaded with debt. The company's debt levels are a little higher than one would want, but it has already paid down $11.8 billion due within the next two years. As long as the company can maintain momentum with sales in new markets and continue to trim its debt load, then today's price and dividend yield look like a great buy.
