The equity markets have experienced an extended bull run for over 10 years. However, the recent correction provides investors with yet another opportunity to buy stocks trading at an attractive valuation and high dividend yields.
The coronavirus outbreak has left investors worried, and this resulted in a double-digit decline for the Dow Jones and S&P 500 in the last seven trading sessions of February 2020. Tech stocks also fell lower, and here we look at three large-cap giants that income investors can consider for 2020 and beyond.
A leading chipmaker
The semiconductor industry has always been cyclical. Chipmakers, including Broadcom (AVGO -4.31%) are affected by demand and supply fluctuations. While innovation can offset some of the volatility, it is just a matter of time until peer companies cash in on the trend, resulting in massive oversupply.
Sales in Broadcom's semiconductor business were down 7% in the fourth quarter of 2019. In the last two years, semiconductor stocks have been affected by the trade war between the world's two largest economies, as well as oversupply issues. Despite these headwinds, Broadcom shares touched an all-time highat the end of December 2019.
At recent prices, Broadcom stock is trading 17% below record highs. The drop in the stock price has pushed up the dividend yield to 4.6% making Broadcom one of the top dividend-paying stocks in the technology sector.
Broadcom has increased dividends for the last 10 years. In the last three years, it has increased dividend payments at an annual rate of 39.3%, while this figure stands at 16.1% for the last year.
Broadcom is also trading at an attractive multiple, making it an ideal pick for value investors as well. It has a forward price-to-earnings multiple of 11.8, and with an estimated five-year earnings growth of 13.3%, its forward PEG ratio is below 1. The PEG ratio takes the price to earnings multiple and combines it with the company's estimated earnings growth. A PEG ratio below 1 suggests a company is undervalued.
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Broadcom's high debt balance of $32.8 billion might be considered risky. However, it has cash reserves of $5.06 billion and an operating cash flow of $9 billion which can be used to service debt and interest payments.
Broadcom's management has forecast revenue growth of 11% in 2020 and is optimistic about its software business, which should be a key driver of the top line this year.
A massive wealth creator
IBM (IBM 0.06%) has created massive wealth for shareholders over the past decades. However, the company has had to reinvent itself in recent years to stay relevant in the ever-changing tech landscape.
IBM is struggling with revenue declines, as its high growth cloud segment has been unable to offset weak sales from the company's legacy business. Now, IBM is optimistic about rising demand for the hybrid cloud services segment, coupled with its acquisition of Red Hat and the cyclical recovery of its system business, to boost revenue in 2020.
IBM stock gained close to 20% in 2019, making it one of the top-performing large-cap stocks in the tech space. After the recent sell-off, shares are trading 19% below 52-week highs. The pullback has meant IBM has a forward dividend yield of 4.83%.
IBM has has increased dividends for the last 24 years. In the last three years, it has increased dividend payments at an annual rate of 3.2% while this figure stands at 0.8% for the last year.
In 2020, Wall Street expects IBM to increase revenue by 2.2% and earnings by 4.4%. It is also expected to increase earnings by an annual rate of 7.3% in the next five years, compared to an annual earnings decline of 5% in the last five years.
IBM is also trading at an attractive forward price-to-earnings ratio of 9.6, given its dividend yield and earnings growth. With a dividend payout of less than 50%, IBM can easily increase payments going forward.
A top defensive stock
One all-weather stock for your portfolio is telecom giant Verizon (VZ 0.90%). Telecom businesses are non-cyclical and can be a great addition in a recession or during market corrections.
Verizon shares are trading 10.5% below its 52-week high, which means its dividend yield is a juicy 4.5%. Verizon has increased dividends for the last 15 years. With a payout ratio -- the percentage of net income distributed to shareholders in the form of dividends -- of less than 50%, Verizon can continue to increase these payments going forward as well.
Mobile phone expenses are a staple expense today that should result in stable cash flows for the company in the upcoming decade. However, the next big driver for Verizon and peers will be the shift to 5G. The increase in wireless speeds will mean consumers may be willing to pay a premium, which will boost revenue growth for the firm.
The 5G tech will not only be game-changing for enterprise, it will also open up several opportunities in high-growth segments such as virtual reality and autonomous driving.
Verizon has partnered with Disney+, which is a streaming service where it offers free subscription for new and existing customers for a whole year. The cord-cutting phenomenon and shift to streaming services may be another driver for Verizon's revenue growth.
Verizon's attractive dividend yield and low forward price-to-earnings multiple of 11 make it a solid pick for both income and value investors.
