It's tempting to chase high-growth stocks as the market hits fresh highs. However, investors shouldn't ignore slower-growth stocks with generous dividends, since high yields can set a floor under the stock when the bears pounce.
When seeking out a dividend stock, investors should look for wide moats, low valuations, sustainable payout ratios, and yields that exceed the S&P 500's average yield of 1.7%. Let's examine three stocks that pass those tests: Philip Morris International (PM -0.51%), Seagate Technology (STX), and AT&T (T 0.07%).
1. Philip Morris International
Philip Morris International was spun off from Altria (MO -0.21%) in 2008. PMI generates all of its revenue overseas, while Altria mainly sells its products in the United States.
PMI is the world's second largest publicly traded tobacco company in terms of revenue after British American Tobacco, which claimed the crown after its acquisition of Reynolds American in 2017. It sells a wide range of cigarette brands, including flagship brand Marlboro and iQOS "heated tobacco" products that warm a stick of tobacco instead of burning it.
PMI is struggling with declining smoking rates worldwide, but it offsets those declines with price increases and the growth of its iQOS business. That balancing act is holding steady, and analysts expect its revenue to rise 5% and 8%, respectively, next year. Those are solid growth rates for a stock that trades at 16 times forward earnings.
PMI has raised its dividend every year since its split with Altria and currently pays a forward yield of 5.3%. It spent 87% of its free cash flow (FCF) on that dividend over the past 12 months, which is somewhat high on average but still gives it adequate room for future increases.
2. Seagate Technology
Seagate is the world's largest maker of platter-based hard disk drives. HDDs face tough competition from flash memory-based solid-state drives (SSDs), which are smaller, faster, more power-efficient, and less prone to damage.
But instead of expanding aggressively into pricier SSDs, Seagate pivoted away from lower-capacity HDDs and developed higher-capacity HDDs for data centers -- which generally prioritize higher storage capacities at lower prices.
Seagate's revenue and gross margin tumbled over the past year, as macro headwinds throttled enterprise spending and original equipment manufacturers sold fewer PCs. However, its revenue has been rising sequentially, its gross margin is stabilizing, and it's consistently repurchasing shares to boost its earnings.
Analysts expect its revenue to dip 1% next year but its earnings to grow 7% -- a decent growth rate for a stock that trades at 12 times forward earnings. Seagate spent only two-thirds of its FCF on its dividends over the past 12 months, and it raised its dividend last year -- which marked its first raise in four years. It currently pays a forward yield of 4.3%.
AT&T, the top wireless carrier in the U.S., has raised its dividend annually for 34 straight years. That makes it an elite Dividend Aristocrat of the S&P 500 -- a component of the index that has raised its dividend annually for at least 25 straight years. AT&T spent just 51% of its FCF on its dividend over the past 12 months, so it has plenty of room for future boosts.
AT&T's massive wireless, wireline, pay-TV, and media businesses give it a comfortable moat against its rivals. However, it's been struggling with the sluggish growth of its wireless business, an ongoing loss of pay-TV viewers at DIRECTV, and the integration of WarnerMedia's assets into its fragmented ecosystem of streaming services. It's also trying to reduce its long-term debt of $153.6 billion -- which was mainly incurred from its purchases of DIRECTV, Time Warner, and AWS-3 spectrum licenses.
Despite those challenges, AT&T expects its FCF levels to remain stable as it cuts costs, divests non-core assets, and streamlines its digital efforts. It also expects to continue growing as it merges its various services into cost-effective bundles.
Wall Street expects AT&T's revenue to stay nearly flat next year as its earnings advance just 2%. Those growth rates look anemic, even relative to its low forward P/E ratio of 11, but its forward dividend yield of 5.4% should set a firm floor under the stock.