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3 Dividend Stocks to Buy on Sale

By Lawrence Rothman, CFA - May 23, 2020 at 11:30AM

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These three companies are solid dividend payers that are at lower prices than they were earlier this year.

The stock market has certainly been through the wringer over the last few months. At one point, the S&P 500 Index fell by more than 30% in just one month before regaining ground since late March.

This volatility may have you looking for stocks that are reliable dividend payers. This presents a challenge since many companies have suspended payouts given the uncertain environment. Even reliable payer Walt Disney stopped dividends for now.

Below are companies whose stock prices have not fully recovered and appear to have the resources and business plans to continue rewarding shareholders with dividend payments.

A stack of coins that gets progressively higher.

Image source: Getty images.

1. Procter & Gamble

Procter & Gamble (PG 0.97%) shares are trading about 10% off late February's level. This movement in price merely followed the overall market.

Meanwhile, the company sells a host of well-known consumer brands like Always, Bounty, Charmin, Dawn, and Pampers across its five segments. The business units are beauty (19% of nine-month fiscal 2020 sales), grooming (9% of sales), healthcare (13% of sales), fabric and home care (33% of sales), and baby, feminine, and family care (26% of sales). These are the kinds of products that do well in every economic cycle. After all, people are still going to buy shampoo, razor blades, toothpaste, paper towels, laundry detergent, and diapers, even in a recession.

These strong brands help explain why Procter & Gamble reported a 5% year-over-year increase in its fiscal third-quarter (ended March 31, 2020) sales and a 7% rise in operating income.

Procter & Gamble has paid dividends for a remarkable 130 straight years. Even more impressive is the board of directors' decision to raise its quarterly payout by 6%, continuing its streak of annual dividend hikes to 64. Its dividend yield is 2.8%.

2. McDonald's

During the first part of February, McDonald's (MCD 1.12%) share price was around $215. Currently, it's about 15% off of that level despite rallying over the last couple of months. The company's first-quarter results, which were off to a good start for the first two months of the year, were hurt by the coronavirus and the ensuing stay-at-home orders.

Second-quarter sales will remain under pressure with limited operations and closures, but I expect results to recover as people return to work and their routines. The company's worldwide presence helps, and its lower-priced offerings are also likely to hold up better in a recession than restaurants with more expensive menus. There are nearly 39,000 locations in 119 countries. With more than 90% of these locations franchised, McDonald's earns revenue from a percentage of revenue and rental payments, since it typically owns the real estate.

Right now, the company has deferred royalty and rental fees to provide financial assistance to franchisees. These should resume as restaurants restore full operations, however.

McDonald's typically generates a huge amount of free cash flow. Last year, its operating cash flow was over $8 billion, resulting in free cash flow of $5.7 billion after $2.4 billion in capital expenditures. This easily covered the company's $3.6 billion of dividends.

McDonald's has raised its payout annually since initiating a dividend in 1976. Currently the company is paying a $1.25 quarterly dividend, which equates to a 2.7% yield.

3. Philip Morris International

Philip Morris International's (PM -0.23%) shares, which were trading in the high $80s in February, are currently priced around $70.

Its first-quarter results were solid, with revenue up 6% and operating income increasing by 36%, both on a GAAP basis. While management noted that the coronavirus pandemic had a limited effect on the quarter's results, the company will feel a greater impact in the second quarter. Like many other companies, management pulled its 2020 guidance.

This near-term uncertainty creates angst among investors. However, Philip Morris has strong international brands, including Marlboro and Parliament, that will carry the company past the pandemic. It sells cigarettes and smoke-free products outside of the U.S., pushing the latter as a safer alternative.

Philip Morris generates a prodigious amount of free cash flow -- over $9 billion last year, handily covering the $7.2 billion in dividends.

With this strong cash flow, the company has a history of hiking its dividends annually. The company currently pays $1.17 per share per quarter, which equates to a yield of 6.8%.

Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short July 2020 $115 calls on Walt Disney. The Motley Fool has a disclosure policy.

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Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
$262.18 (1.12%) $2.90
The Procter & Gamble Company Stock Quote
The Procter & Gamble Company
$146.67 (0.97%) $1.41
Philip Morris International Inc. Stock Quote
Philip Morris International Inc.
$99.24 (-0.23%) $0.23

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

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