Dividend cuts and suspensions are becoming standard practice during the novel coronavirus pandemic. Companies that have pulled back on dividends to preserve cash include automakers, retailers, real estate investment trusts, energy companies, and a mishmash of others. Some stocks that were once thought to be safe dividend picks are turning out to be anything but.
While dividend investing has become more difficult as companies reel from the pandemic, there are still some solid dividend stocks out there. Two of the best, thanks to a combination of dividend safety and exceptionally high yields, are International Business Machines (IBM +0.98%) and AT&T (T +0.47%).
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International Business Machines
IBM hasn't let the pandemic derail its multi-decade streak of dividend increases or its century-plus record of uninterrupted dividend payments. The tech giant announced a 1% dividend bump in April, bringing its quarterly per-share dividend up to $1.63. With that increase, IBM has now raised its dividend for 25 years in a row.
IBM's business has been negatively affected by the pandemic, and the full scope of the disruption won't be known until the crisis passes. The company reported a sales decline in the first quarter, partly due to clients pulling back on spending. The software business, where deals often close during the last two weeks of the quarter, was hit particularly hard.
But IBM has some advantages. Around 60% of IBM's total revenue is recurring, and the majority of revenue comes from clients in financial services, the telecom industry, and the public sector, all of which may see less disruption from the pandemic than other sectors. IBM mostly serves large organizations, so it's not heavily exposed to the mass of small businesses at risk of failing.
None of this guarantees that IBM's dividend is safe. A deep enough recession could hurt IBM enough to prompt a dividend cut, especially given the elevated level of debt from the acquisition of Red Hat. But that risk is present for nearly every company. With a dividend yield well over 5%, IBM is a solid high-yield dividend stock for these uncertain times.
AT&T
Shares of AT&T currently yield over 7%, historically high for the telecom giant. In the past, if you could snag AT&T stock when the yield spiked above 6%, you were getting a good deal.
AT&T's core business is wireless, and that should throw off a lot cash regardless of the economic environment. In the first quarter, mobility service revenue was up 2.5%, and the company added 163,000 postpaid phone net subscribers. However, competition and consumers trading down to cheaper wireless plans could certainly hurt AT&T's results in the coming quarters.
What makes AT&T a bit of a wildcard compared to other telecom stocks is everything else the company does. AT&T is set to launch its HBO Max streaming service on May 27, the result of the company's massive acquisition of Time Warner. The company is also managing a sustained decline in its TV business – nearly 900,000 premium TV subscribers fled during the first quarter.
The acquisitions AT&T made to transform itself into an entertainment conglomerate loaded up the balance sheet with debt, and that makes the company more fragile. But as long as the wireless business holds up reasonably well during this crisis, the dividend should be fairly safe. Smartphones and wireless service are necessities for most people, even during a recession.
While the excessive debt and AT&T's questionable acquisition strategy may make the stock riskier than its peers, the sky-high dividend yield is hard to pass up.
