Dividend investing is a good way to beat the market through the power of compounding. And dividend-paying stocks tend to outperform during recessions due to their resilient, cash-generating business models. That's great news for investors looking to scoop up stocks during the pandemic.
Despite the uncertainty in the market, these three dividend-paying tech stocks are good buys in May. The first pick, Verizon (VZ 0.32%) is a safe, high-yielding bet on the telecommunication sector, while Microsoft (MSFT -1.40%) and Apple (AAPL -1.59%) are investments in the fast-growing software and consumer hardware industries. All three companies have grown their payouts for over seven years straight. And they are set to outperform the market because of their compelling long-term growth drivers.
Image Source: Getty Images.
1. Verizon: Current yield of 4.5%
Verizon Communications is a high-yield tech stock set to outperform the market. Its telecommunications business is resilient to coronavirus-related challenges in the near term and stands to benefit from massive long-term trends such as the rollout of 5G networks and the Internet of Things (IoT).
Its top line held up well in the first quarter, which felt the early brunt of the pandemic. Total revenue fell slightly -- down 1.6% year over year to $31.6 billion, while adjusted EBITDA was down 0.1% to $11.9 billion. The company saw a surge in data usage related to gaming and collaboration tools as lockdowns boosted demand for mobile entertainment and work-from-home opportunities.
Verizon also has an excellent opportunity in the rollout of the Internet of Things, which will see millions of devices ranging from microwaves to industrial machinery brought online. The 5G market is estimated to be worth $5.5 billion in 2020 and grow at a compound annual rate of over 120% through 2026. The company is well positioned to take advantage of this opportunity thanks to its rapidly expanding 5G network in the U.S.
Verizon stock yields 4.5% as of this writing, and it has increased its payout for 13 years running. The company generated earnings per share of $4.65 in 2019 while paying out $2.435 per share, giving it a sustainable payout ratio of around 52%.
2. Apple: Current yield of 1.1%
Apple is a fairly new candidate for income investors, initiating a steady payout seven years ago and raising it annually since then. But with a payout ratio of just 25%, coupled with $90 billion of cash and over $75 billion of share repurchases in just the past year, the company is set to return massive value to shareholders for the foreseeable future.
The stock has held up well in the face of the coronavirus with shares up 5% year to date compared to an 11% decline for the S&P 500. And Apple is set to continue outperforming the market thanks to its rapidly growing services segment, as well as its wearables, home, and accessories business. These two divisions will make up for slowing iPhone sales and ensure dividend sustainability for years to come.
Apple's total revenue rose slightly in the fiscal 2020 second quarter, which ended on March 28. The company reported $58.3 billion in total net sales, up 0.5% from the prior-year period. The quarter experienced slowing consumer hardware sales, which includes the iPhone, Mac, and iPad. However, Apple's services, along with its wearables, home, and accessories business, showed a different trend, with the two growing 16.6% and 22.4%, respectively.
Those two segments will be Apple's main growth drivers going forward. And they will help the company sustain its dividend over the long term. They make up an increasing portion of the top line, now representing 33.7% of sales, up from 28.6% in the year-ago quarter.
3. Microsoft: Current yield of 1.1%
With a market cap of nearly $1.4 trillion, you might assume Microsoft is done growing, but you would be wrong. This blue chip tech company is rapidly expanding its business through emerging industries like cloud computing, which is set to power its next leg of long-term growth. Add that to a sustainable dividend, and you've got a compelling stock to add to your portfolio.
Like other stocks on this list, Microsoft enjoys a business model that is resilient to the COVID-19 fallout. Revenue increased 14.6% year over year to $35.0 billion in the fiscal third quarter, which ended on March 31. The stock has also outperformed the broad market with shares rising 16% year to date.
Microsoft's intelligent cloud segment is the company's fastest-growing business with revenue up 27.3% last quarter. The segment includes Microsoft's Azure public cloud, which competes with Amazon Web Services, the current market leader in the industry. This is a business that is set to continue growing at a rapid rate due to a secular shift toward cloud computing in the global economy.
Microsoft has a dividend yield of 1.1% as of this writing. And the company paid $1.99 of dividends per share in the trailing 12-month period versus diluted earnings of $6.00 per share, giving it a low payout ratio of 33%. The company has grown the dividend for almost 15 years running.
