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3 Top Dividend Stocks to Buy in May

By Reuben Gregg Brewer, Brian Stoffel, and George Budwell – Updated May 9, 2019 at 5:07PM

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Look past the surface for these strong contenders.

Finding a good dividend stock isn't easy today, with the stock market again up near all-time highs. But that doesn't mean you can't; you just need to do a little extra legwork. If you are looking for some great dividend buys in May, you might want to consider technology giant Microsoft (MSFT -0.97%), drugmaker AstraZeneca (AZN -3.21%), and landlord VEREIT (VER). Here's a quick primer on each.

Buy for more than the dividend

Brian Stoffel (Microsoft): Dividend-paying stocks make up a very small part of my personal portfolio -- but that's because I'm decades away from retirement and focus on "growth" stocks. Were I on retirement's doorstep, Microsoft would be one of my top holdings -- both for the business itself and for its dividend.

A jar of coins with the label "dividends" on it.

Image source: Getty Images.

The company's turnaround under CEO Satya Nadella was enough for me to dub it one of the top IT stocks to buy for 2019. Its focus on utilizing the software-as-a-service (SaaS) model with its Office 365 and Azure cloud products has been wildly successful.

And Microsoft's "other" offerings have also panned out well. While the gaming units, for instance, have lagged, that has been more than offset by strength in LinkedIn and PC sales of Window products.

And the company's dividend offers a lot to like. While it currently yields just 1.4%, the dividend only ate up 40% of Microsoft's $34 billion in free cash flow over the past year. That means that the payout is not only very safe but also has lots of room to grow.

More than meets the eye

George Budwell (AstraZeneca): AstraZeneca may not jump off the page as a top dividend stock to buy right now. After all, the company is still dealing with the ripple effects stemming from the loss of exclusivity for former star drugs like Nexium and Crestor. And AstraZeneca's aggressive approach toward restocking its product portfolio -- through licensing deals and acquisitions -- has taken a toll on its balance sheet. Driving this point home, the drugmaker's debt-to-equity ratio now sits at an unsightly 179.6.

AstraZeneca hasn't been able to add any juice to its dividend program in more than four years at this point. In fact, the company's net income isn't even fully covering the dividend at current levels -- an issue that has deeply concerned income investors for awhile now. All of these black marks, however, should start to fade from view in a big way within the next two years -- making now a great time to dig deeper into this top pharma play.

What's the scoop? While AstraZeneca's slow-motion turnaround has taken some unexpected twists and turns, the company is on track to return to solid levels of top-line growth as early as next year. The lowdown is that several of the drugmaker's next-generation products are starting to shine. In cancer, AstraZeneca's Lynparza, Imfinzi, and Tagrisso are all set to be blockbuster products. On the diabetes front, Farxiga, an SGLT2 inhibitor indicated for type 2 diabetes, has a shot at eventually hauling in nearly $3 billion in annual sales. And the blood-thinning agent Brilinta has also transformed into a key component of the drugmaker's turnaround story.

The bottom line is that AstraZeneca's net income should steadily rise from this point forward, giving it the financial capacity to pay down debt and strengthen its highly coveted dividend program. More to the point, the worst appears to be over for this elite drugmaker, which offers a generous 3.7% yield.

Almost through the storm

Reuben Gregg Brewer (VEREIT): VEREIT is a net lease real estate investment trust (REIT) with a hefty 6.5% yield, nearly twice what its largest competitors offer and three times what you'd get from an S&P 500 Index fund. The reason for the high yield is pretty simple: The company is still working its way back from an accounting error from a few years ago.

The interesting thing here, however, is that it has made massive strides. VEREIT has a new management team led by respected industry veteran Glenn Rufrano. It has rebalanced the portfolio, basically hitting all of its diversification targets and jettisoning noncore assets outside of property ownership. It has regained investment-grade status from the major credit rating agencies. And it has reinstated the dividend (which was suspended for just two quarters) with a solid 80% payout ratio. The only lingering issues are the shareholder lawsuits that resulted from the accounting error.

But even there, the company has made material progress. It has now settled with roughly a third of shareholders for $250 million or so. Taking a conservative view of things, that suggests VEREIT will be able to put these lawsuits behind it for around $1 billion. At the start of 2019, it had around $1.7 billion of availability on its revolving credit facility. It can handle the hit.

VER Dividend Yield (TTM) Chart

VER Dividend Yield (TTM) data by YCharts.

Once the lawsuits are in the past, meanwhile, investors are likely to reevaluate the REIT. That should lead to a trimming of the valuation gap between VEREIT and its peers. If you act now, though, you can collect a generous yield, buying before Wall Street catches on to the improving legal outlook.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Brian Stoffel has no position in any of the stocks mentioned. George Budwell owns shares of AstraZeneca. Reuben Gregg Brewer owns shares of VEREIT. The Motley Fool owns shares of and recommends Microsoft. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Microsoft Corporation Stock Quote
Microsoft Corporation
$246.79 (-0.97%) $-2.41
AstraZeneca PLC Stock Quote
AstraZeneca PLC
$54.91 (-3.21%) $-1.82
VEREIT Stock Quote

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