The equity markets remain volatile. Despite a strong rebound in April, many stock are still down year to date. Uncertainty abounds as the COVID-19 pandemic has driven consumer spending significantly lower, while the industrial sector has also come to a near standstill as a result of worldwide lockdowns.
With interest rates near record lows, the stock market continues to remain the best bet to create long-term wealth. Now, income investors have a chance to buy top-quality stocks with generous yields at a bargain.
But in such an environment, investors must first identify financially strong companies with robust fundamentals. Here are three such dividend stocks to consider right now.
A cannabis-focused enterprise
While most pot stocks have burned massive investor wealth in the last year, there is one ancillary company that has performed better than most. Innovative Industrial Properties (IIPR +1.86%) is a cannabis-focused real estate investment trust (REIT). The stock is up 2% year to date as of this writing and has returned 285% since it went public in Dec. 2016.
Despite this impressive performance, Innovative stock is trading 40% below the record high it set last summer. We know that stock price and dividend yields move in opposition to each other. The recent pullback increased Innovative's forward yield to a tasty 5.3%.
Innovative acquires medical-use cannabis facilities. It then leases them out to licensed marijuana producers under long-term, triple net-lease agreements. Though several states have legalized marijuana, it is still illegal at the federal level. This poses many difficulties for cannabis companies, as financial institutions are unwilling to provide capital for expansion. As production facilities are capital intensive, Innovative's business model aims to help licensed producers by reducing their capital burden.
Image source: Getty Images.
Innovative is profitable and growing at a fast pace, though it is primarily growing revenue via acquisitions. As of April 22, the company owned 55 properties in the U.S. totaling 4.1 million rentable square feet. The weighted average remaining lease term of these properties is approximately 16 years, which should ensure a stable, long-term stream of income. The acquisitions will continue to gain pace as several other states eye legalizing marijuana in the coming years. The cannabis industry is still at a nascent stage and is expected to grow rapidly in the upcoming decade.
In 2019, Innovative's adjusted funds from operations rose 259% to $34.9 million, compared to a 202% rise in revenue. With 17.04 million shares outstanding, Innovative will pay total dividends of $68.2 million in 2020 (based on the latest payout), which means it can continue to make these payments given its operating cash flow and a cash balance of $82.2 million at the end of 2019.
A telecom giant
The telecom sector is considered recession-proof. Even in times of lower consumer spending, people are likely to keep paying their telephone bills. The internet age means internet access and data are now important utilities that result in predictable cash flows for telecom firms.
One might argue that AT&T (T 0.39%) is no longer a pure-play telecom company. It has ventured into entertainment businesses in the last decade. Its Warner Bros. movie studio will take a massive hit due to production delays and shutdowns in 2020. Furthermore, movie theaters may be among the last businesses to reopen amid the lockdown, which will hurt the company. Its DIRECTV business is also losing subscribers due to the cord-cutting phenomenon.
However, a part of this weakness should be offset by AT&T's foray into streaming, a segment that has experienced a significant uptick in these uncertain times. HBO Max is expected to launch at the end of May at a subscription cost of $14.99 per month. The upcoming transition to 5G will also help drive AT&T's top-line growth in the next two years.
AT&T stock has lost 24% in 2020 as of this writing, meaning its yield is now 7%. While the stock will likely move higher once the market rebounds, investors could double their money in less than 11 years by just reinvesting dividend payouts at the current rate.
Last year, AT&T made $14.9 billion in dividend payments. At the beginning of this year, management estimated free cash flow for 2020 would amount to $28 billion, making a dividend cut highly unlikely even if these forecasts fall significantly due to the ongoing pandemic. AT&T suspended its share repurchase program to protect dividend payouts.
A well-diversified heavyweight
3M (MMM 0.12%) is a large conglomerate operating in multiple industries such as safety and industrial, transport and electronics, and healthcare and consumer. In the first quarter of 2020, 3M sales were up 2.7% to $8.1 billion, primarily driven by strong sales in its healthcare business, which were up 21% year over year. The healthcare segment accounted for 26% of total sales in the first quarter.
This impressive rise was offset by weak results in the safety and industrial and transport and electronics businesses. The company is ramping up production of N95 masks, and this might add $250 million in company sales.
3M doubled its global output of N95 respirators to 1.1 billion per year. It is working with the U.S. Department of Defense to again double its annual production to two billion by the end of 2020. By June, 3M expects to produce N95 masks at a rate of 50 million per month, a 40% increase compared to 35 million currently.
While 3M revoked its guidance for the rest of the year, the company announced several cost-cutting measures to fight lower demand. In the second quarter, the company aims to reduce costs between $350 million and $400 million. Management also reduced the capital expenditure budget for the year from as high as $1.8 billion to just $1.3 billion.
Like AT&T, 3M also suspended its share buyback program. In 2020, 3M will prioritize dividend payments and organic investments. 3M stock is down about 16% year to date and yields nearly 4% as of this writing.
All three companies are in a position to maintain their generous dividend payouts with the potential for long-term capital appreciation as well. Investing in such high-quality dividend stocks should generate substantial returns for your portfolio.
