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If You Like Dividends, You Should Love These 3 Stocks

By Dave Kovaleski – Updated Jun 3, 2020 at 11:54AM

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T. Rowe Price, IBM, and Home Depot are dividend machines.

Many companies have been suspending their dividends during the COVID-19 crisis, and in many cases it is understandable. In times of economic stress, it makes sense to preserve capital. But in other cases, it could also indicate a deeper problem at the company that requires some further investigation on the part of the investor.

At the same time, many companies are maintaining or increasing their dividends during this crisis. That is not always the right move if the dividend payout comes at the expense of making key investments in the company or draining liquidity. However, in many instances, it is a sign of stability and solid long-term earnings power. Here are three stocks that dividend investors should love.

No. 1: T. Rowe Price Group

Baltimore-based T. Rowe Price Group (TRP -2.28%) is not as high-profile as some of the bigger names in the financial sector, but it clearly stands out as a great dividend stock. In March, the asset management firm increased its quarterly dividend by 18%, to $0.90 per share, and maintained that payout amount in June for a robust yield of 2.9% as of Wednesday morning. T. Rowe Price has increased its dividend every year for more than a decade. It also has a great payout ratio of 15%, which means it pays out just 15% of its earnings to maintain that dividend. A high ratio could signal that a company is paying out too much of its earnings to keep that dividend going.

A big reason that T. Rowe Price is such a great dividend stock is its debt -- or virtual lack thereof. And it has had steady long-term growth in assets under management over the past decade, gaining market share on its competitors. These are all ingredients of a great dividend stock.

The IBM building in Chicago.

Image source: Getty Images.

No. 2: IBM

IBM (IBM -2.32%) was once the biggest name in tech. While its standing is a bit diminished, it remains a key player, especially after its purchase of cloud-computing company Red Hat last year. Also, IBM is well known for having a great dividend -- or at least it should be. 

There is a lot to love about IBM's quarterly dividend, which it raised in May to $1.63 per share, up from $1.62 the previous quarter. With the increase, IBM joined an exclusive club -- the Dividend Aristocrats, companies that can boast 25 straight years of increasing dividends. Big Blue pays out a high dividend yield of 5.2% at today's prices. Its payout ratio is about 50%, based on almost $12 billion in free cash flow over the past 12 months. That's a little on the high side, but in line with historical rates. It should be sustainable given the growth it has seen, especially in the cloud business. 

Currently, IBM is trading at about $129 per share, down 4% on the year. IBM CEO Arvind Krishna said the company recognizes the importance of the dividend and remains fully committed to it. "IBM's free cash flow and our strong balance sheet gives us confidence to both invest aggressively in cloud and AI technologies, while also returning value to our shareholders," he said.

No. 3: Home Depot

Home Depot (HD -0.86%) is not a Dividend Aristocrat, but it pays a royally good dividend. The home improvement store bumped up its quarterly dividend to $1.50 per share in the first quarter, a 10% increase over the previous year. It maintained that $1.50 dividend for the second quarter, paying out a yield of 2.4% on a share price around $251 as of Wednesday morning. The big-box retailer has been deemed an essential business and has not been forced to shut down during the pandemic. In fact, it is coming off an excellent quarter, with sales up 7% over the first quarter of 2019.

Revenue was helped by strong e-commerce sales, as my colleague Demitrios Kalogeropoulos explained. Home Depot has increased its dividend every year for the last 11 years, and as the retail landscape continues to shift, Home Depot remains on a solid foundation. As a market leader with an increasingly greater online presence, investors should expect that streak to continue.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Home Depot and recommends the following options: long January 2021 $120 calls on Home Depot and short January 2021 $210 calls on Home Depot. The Motley Fool has a disclosure policy.

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Stocks Mentioned

International Business Machines Corporation Stock Quote
International Business Machines Corporation
IBM
$118.81 (-2.32%) $-2.82
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$275.94 (-0.86%) $-2.39
TC Energy Corporation Stock Quote
TC Energy Corporation
TRP
$40.29 (-2.28%) $0.94

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

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