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Love Dividends? 3 Stocks You Might Want to Buy

By Robert Izquierdo – May 2, 2020 at 9:30AM

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It takes more than dividend yield to make a great dividend stock. Here are 3 companies that fit the bill.

These days, it's a skill finding stocks that aren't likely to cut their dividends in 2020. More than ever, weak financial health is the bane of dividends and there is nothing like a global pandemic to help sort out which companies weren't as strong financially as you might have thought or prepared to take a hit. That's why it's important to identify solid companies prepared not only to weather the uncertainty created by the coronavirus pandemic but also to adapt to changes over time -- whatever those changes might be.

To that end, here are three companies that have tackled changes head-on. If you love dividends, these are ones to consider adding to your portfolio. Let's dive into why.

The word "dividends" spelled out on wooden blocks against a gray background.

Image source: Getty Images.

1. Cisco: 3.39% dividend yield

Cisco (CSCO -1.19%) has an attractive dividend yield and strong financials to maintain it. In its second-quarter 2020 earnings report, the company had over $40 billion in current assets with $8.5 billion of that in cash. Contrast that with $22 billion in current liabilities, of which $1.5 billion is short-term debt.

This healthy balance sheet, combined with a current payout ratio of 56% and a history of paying consistent dividends since 2011, suggests the company has the funds to support its dividend. So what about the business itself?

Cisco got its start producing computer networking hardware, but that business started declining as companies began shifting to cloud computing solutions. It responded to this trend by successfully expanding into software.

Its software division includes its WebEx videoconferencing platform, which has enjoyed tremendous growth after many people were forced to work from home due to the pandemic. WebEx reached a record 324 million users in March. Its AppDynamics software, used by companies to monitor IT infrastructure, saw double-digit growth during the second quarter.

Cisco earns recurring revenue from its software products using a software-as-a-service subscription model. This adds a stable revenue stream for the company.

In addition, its networking hardware sales will benefit from the broader growth trends of the Internet of Things and 5G, both of which create the need for wireless technology, and in turn, increase demand for Cisco's solutions. These factors make Cisco an attractive dividend stock.

2. Home Depot: 2.71% dividend yield

Home Depot (HD 0.67%) has a solid dividend track record. In its last earnings announcement, for the 2019 fourth quarter, Home Depot raised its dividend by 10%, marking the 11th straight year of dividend payments. With the company's 59% payout ratio, it's likely to maintain its dividend. 

Still, while the company had a successful 2019, in which Home Depot experienced the highest sales in its history, this year will be challenging due to the coronavirus pandemic. To bolster the company's financial flexibility during this crisis, Home Depot borrowed $5 billion, adding to the $2.1 billion in cash it held at the end of the fourth quarter. A bright spot is that the retail stores were designated an essential business and were thus allowed to remain open.

Helping Home Depot weather the pandemic is the company's One Home Depot initiative. The project seeks to create a seamless retailing experience between digital shopping and its physical stores. This evolution in its business is essential as consumers increasingly expect less division between e-commerce and in-store shopping.

The strategy paid off last year as digital sales grew 21.4% over 2018. Today, with many people confined to their homes, the One Home Depot project facilitates e-commerce sales. Thanks to Home Depot's forward thinking, the company is in a better position to return to its pre-pandemic sales success over the long run.

3. Costco: 0.92% dividend yield

Costco (COST -4.26%) may have a modest dividend yield, but it is a rock-solid company that continues to prosper despite the pandemic. In February, Costco's sales grew 13.8% year over year; in March, as the impact from the pandemic intensified, sales rose 11.7% year over year.

This sales resilience is not just because the company provides consumer staples. It collects recurring revenue from membership fees. Also, before the pandemic, Costco saw the rise of e-commerce and wisely invested in building up digital shopping capabilities.

Now the company is seeing strong e-commerce growth. February's e-commerce sales rose 22.6% year over year. In March, e-commerce sales grew by 48.3% as many consumers remained sheltered at home.

The company also has a strong balance sheet with $7.8 billion in cash as of the end of its 2020 second quarter. Coupled with a payout ratio of 33%, investors are ensured Costco's dividend is safe. In fact, the company announced a dividend increase on April 15. All these factors, even during a pandemic, make Costco a sensible investment.

A solid trio

Each of these companies saw opportunities and took steps to strengthen their businesses. As a result, dividends can continue while financial health is maintained over the long term, making these dividend stocks worthwhile investments.

Robert Izquierdo has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Home Depot. The Motley Fool recommends Costco Wholesale and recommends the following options: long January 2021 $120 calls on Home Depot and short January 2021 $210 calls on Home Depot. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
$40.66 (-1.19%) $0.49
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
$270.94 (0.67%) $1.80
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
$466.40 (-4.26%) $-20.77

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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