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3 Attractive Dividend Stocks to Buy in May

By Harsh Chauhan - May 9, 2020 at 8:45AM

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These tech giants could turn out to be solid dividend picks in these uncertain times.

The novel coronavirus pandemic is giving dividend-focused investors sleepless nights. Companies are now concerned with preserving their balance sheets to ride out the economic impact of the COVID-19 disease, and that has resulted in dividend cuts and suspensions.

Despite the uncertainty, Microsoft (MSFT -0.40%), Cisco (CSCO 5.81%), and NVIDIA (NVDA 2.39%) are three stocks that dividend investors should consider for their portfolios. These three tech giants look capable of riding out the novel coronavirus-induced uncertainty thanks to the businesses they are in, and also have strong balance sheets to protect their payouts.

The word Dividends written on a blackboard with other doodles.

Image Source: Getty Images

1. Microsoft defies the coronavirus blues

Microsoft's fiscal 2020 third-quarter earnings reveal that COVID-19 is having a minimal impact on its business so far. The company's top line increased 15% annually during the quarter that ended in March, driven by a terrific 27% increase in the cloud business, a 15% increase in the productivity business, and a 3% increase in personal computing.

The software giant easily beat Wall Street's expectations, and its guidance was also in line with expectations. Anyone who follows Microsoft won't find this surprising, as demand for laptops, cloud usage, and video games has been on the rise. Shelter in place orders and lockdowns across the globe have kept people confined to their homes to contain the spread, leading to a jump in demand for Microsoft's products.

Throw in a robust balance sheet, and it becomes clear why Microsoft is one of the top dividend stocks you can buy, even though its yield of 1.14% may seem on the lower side. The dividend seems safe, as the company has just over $137 billion in cash and $84 billion in debt, while its payout ratio is around 33%. It has raised its dividend every year since fiscal 2011.

What's more, the company's free cash flow and margin have been heading north over the past year.

MSFT Free Cash Flow Chart

MSFT Free Cash Flow data by YCharts

Finally, Microsoft trades at a trailing price-to-earnings (P/E) ratio of 29, compared to a five-year average multiple of 35. At this attractive valuation, Microsoft could prove to be a nice bet for dividend investors -- it can not only provide a regular stream of income but also leave open the possibility of stock price upside if it keeps beating the COVID-19 blues.

2. Cisco is a cash-rich company with a nice dividend

Networking behemoth Cisco Systems started paying a dividend back in 2011, and it has raised its payout every year since then. Its latest hike came in February this year when the company decided to increase the payout by 3%, taking the dividend yield to an impressive 3.40%.

The good part about Cisco's fat dividend is that it is backed by a robust balance sheet. Its cash pile of $27 billion comfortably exceeds its total debt of $17 billion. Additionally, its free cash flow has been heading north over the past year or so.

CSCO Free Cash Flow Chart

CSCO Free Cash Flow data by YCharts

More importantly, Cisco's business may be able to withstand the impact of the coronavirus pandemic. Demand for 5G wireless network equipment is reportedly robust even in these times, as evidenced by results from Cisco's peer Nokia (NOK 1.38%).

Nokia CEO Rajeev Suri pointed out that the company didn't witness a dip in demand in the first quarter. The Finnish giant struck 70 commercial 5G deals during the quarter, and 21 networks went live. Though Nokia did state that its second-quarter performance will be affected by the COVID-19 outbreak, the company expects a seasonally strong performance in the second half of 2020.

This is good news for Cisco, as at the end of 2019 the company was reportedly in negotiations with over 100 telecom operators to deploy 5G networks. There were 40 companies already using Cisco's 5G solutions to deploy their networks. It has been reported that 5G roll-outs are continuing despite the pandemic, which could give Cisco's business a nice boost even in these times.

And finally, Cisco's trailing P/E of 16 is quite cheap when compared to last year's multiple of 19, giving investors another reason to love this dividend stock.

3. Why NVIDIA could have a place in a dividend investors' portfolio

NVIDIA may look like a surprise choice in this list, as its dividend yield is a meager 0.23%. The company is quite stingy when it comes to loosening its purse for investors, as the payout ratio of 14% indicates. That's despite the fact that NVIDIA has a robust balance sheet with nearly $11 billion in cash and debt of only $2.64 billion. Its free cash flow and margins have been moving up for the past year.

NVDA Free Cash Flow Chart

NVDA Free Cash Flow data by YCharts

But NVIDIA is remaining conservative with its dividend, which it started paying toward the end of 2012. The graphics specialist used to pay out a dividend of $0.075 per share at that time, which has now grown to $0.64 a share. It has raised its dividend consistently over the years, though the last hike was declared in November 2018.

NVIDIA's dividend has remained stagnant since then as the company makes stride in areas such as artificial intelligence, data centers, and video gaming. It recently completed the $6.9 billion acquisition of Mellanox Technologies, which it paid for in cash. That's probably the reason why NVIDIA hasn't raised its dividend of late.

The good part is that Mellanox could give NVIDIA's business a nice bump and start being "immediately accretive" to the chipmaker's margins, earnings, and cash flow. Wall Street was already anticipating the novel coronavirus outbreak to be a catalyst for the company, and Mellanox could add more fuel to NVIDIA's prospects by strengthening its data center business. What's more, NVIDIA is also acquiring networking software provider Cumulus Networks for an undisclosed sum to bolster its data center ambitions.

All these moves should pave the way for long-term growth at NVIDIA. The tech giant has been beating the broader market downturn thanks to its strength in the cloud, and it may be able to sustain that momentum given its latest moves.

NVDA Chart

NVDA data by YCharts

So NVIDIA could turn out to be a coronavirus-resistant stock, and ensure a small dividend at the same time. This is why it may be a good idea for income-oriented investors to take a closer look at the graphics specialist despite its small yield.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft and NVIDIA and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Microsoft Corporation Stock Quote
Microsoft Corporation
$290.17 (-0.40%) $-1.15
Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
$49.37 (5.81%) $2.71
NVIDIA Corporation Stock Quote
NVIDIA Corporation
$187.73 (2.39%) $4.38
Nokia Corporation Stock Quote
Nokia Corporation
$5.13 (1.38%) $0.07

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

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