The coronavirus pandemic recently killed the 11-year-old bull market and opened the floodgates for the bears. Bear markets are inevitable, but buying dividend growth stocks that regularly raise their payouts can help you weather grizzly times -- especially if you reinvest those dividends to take advantage of dollar-cost averaging.
It's tempting to buy dividend stocks with the highest yields, but some of those stocks can have unattractive payout ratios. Meanwhile, well-run companies that pay stable dividends at lower payout ratios could significantly raise -- or even double -- their existing dividends during market downturns to help lock in investors. Let's take a look at three income stocks that fit that bill: Apple (NASDAQ:AAPL), Intel (NASDAQ:INTC), and Oracle (NYSE:ORCL).
1. Apple: Near-term challenges, but plenty of FCF to raise the dividend
Apple's stock slipped more than 20% over the past month after it warned that coronavirus-induced supply chain disruptions would throttle its second-quarter growth. It noted its iPhone supply was "constrained," and that temporarily store closures would impact its sales in China, which accounted for 15% of its top line last quarter.
However, in recent years Apple has been reducing its dependence on hardware sales while expanding its services ecosystem, which generated 14% of its revenue last quarter. Robust sales of AirPods and Apple Watches are also reducing its long-term dependence on the iPhone.
Apple currently faces more headwinds than tailwinds, but it still generated free cash flow (FCF) of $64 billion over the past 12 months. It spent just 22% of that total on its dividend over the same period, which gives it plenty of room to raise its forward yield of 1.1%. Apple has raised its dividend annually ever since it was reinstated in 2012, but doubling its payout could soothe tattered nerves as it deals with near-term challenges.
2. Intel: Boosting payout would set a floor under the stock
Intel's stock fell more than 30% over the past month, even as analysts predicted that the coronavirus crisis could relieve its chip shortage by throttling market demand for CPUs. Intel's Chinese plants in Dalian, which mainly produce memory chips, weren't heavily affected by the outbreak.
Nonetheless, investors remain concerned about Intel's ongoing market share losses to AMD (NASDAQ:AMD) in PCs and data centers. Intel's CEO Bob Swan, the former CFO who took the helm after Brian Krzanich's abrupt exit in mid-2018, also doesn't inspire as much confidence as AMD's visionary CEO Lisa Su. The recent discovery of new security flaws in Intel's chips further eroded investor confidence.
Despite those challenges, Intel's core business remains stable, and it's raised its dividend for five straight years. However, it only spent about a third of its FCF of $16.9 billion on those dividend payments over the past 12 months -- which suggests it has plenty of room to raise its forward yield of 2.6%. Boosting that payout would set a floor under the stock and reward investors for their patience.
3. Oracle: Resolving its issues and raising its dividend consistently
Oracle's stock also tumbled nearly 30% over the past month. I was once bearish on Oracle due to its sluggish revenue growth, lack of competitive advantages in the cloud market, and heavy dependence on buybacks for earnings growth. The resignation and death of co-CEO Mark Hurd, who previously led its cloud efforts, further dimmed its prospects.
Oracle hasn't resolved all those issues yet, but its recent third-quarter report -- which featured 2% annual revenue growth, 4% growth in its cloud services and license support revenue, and stable operating margins -- indicated that the headwinds were waning. In the cloud business, its Fusion ERP (Enterprise Resource Planning) platform led the charge with 37% sales growth. Oracle also boosted its buyback authorization by $15 billion.
Oracle generated $12.4 billion in FCF over the past 12 months, but it only spent 19% of that total on its dividend. Oracle traditionally favors buybacks over dividends, but it still raised its dividend annually over the past eight years. Doubling its forward yield of 2.4% could make it an attractive alternative to classic tech dividend stocks like IBM.