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4 Stocks to Buy With Dividends Yielding More Than 4%

By James Brumley – Jun 29, 2020 at 9:54PM

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Interest rates may be at rock-bottom levels, but that doesn't mean income investors can't step into some nice payouts.

Stocks may have recovered most of what was lost in February and March, shortly after the novel coronavirus began to spread in the U.S., but few investors are naive enough to think the market and the economy are as strong as they were early this year. The recent bullishness is mostly founded on hopes for a quick recovery.

With that as a backdrop, it wouldn't be a terrible idea to take a step back and let dividends do some work while growth-oriented names figure out where they should truly be trading. You certainly deserve the mental break! Here's a rundown of four top dividend names, each of which currently yields more than 4% (versus the S&P 500's current average yield of just under 2%).

Desk, with roll of cash, calculator, and stack of paper with the word dividends written on the top sheet

Image source: Getty Images.

Verizon's simplicity is its strength

Current dividend yield: 4.5%

There's nothing particularly riveting about telecommunication name Verizon Communications (VZ -1.49%). It owns and operates web portals Yahoo and AOL, but they're little more than pet projects now. Verizon is almost exclusively a communications name, and is setting itself up for more of the same going forward. It's upped up its capital spending budget this year by $500 million more than last year's planned expenditures, mostly to expand its 5G network that most customers will never see but will certainly be happy to plug into.

Verizon may be a bit on the boring side, but boring also means it's predictable. The company's revenue growth may be habitually in the single digits, but this year's expected (and typical) income of $4.75 per share is far more than enough to support the current annualized dividend payout of $2.46 per share.

The graphic below tells the tale, laying out not just Verizon's dividend history ($0.5775 per share in early 2017 to $0.6150 in early 2020), but  earnings per share and revenue over those years (rising overall). The mean forecasts from analysts extends the trends of actual results already produced by the company. The advent of a combined Sprint and T-Mobile seemingly poses a threat to Verizon's dominance of the wireless space, but even before they were united the two companies weren't collectively able or planning to outspend Verizon.

Verizon (VZ) earnings, revenue, and dividends, past and projected

Data sources: Thomson Reuters/Refinitiv. Chart by author.

AbbVie has its fair share of blockbusters

Current dividend yield: 4.9%

AbbVie (ABBV -1.29%) is among the several pharmaceutical names that have been caught up in the fervor linked to the race for a coronavirus vaccine. Although its HIV drug Kaletra was a bust as a treatment for COVID-19, it's still working with partners from the academic arena on a solution.

Potential for a coronavirus therapy alone is a terrible reason to make a bet on a stock, though. If this coronavirus goes away or eventually mutates, the work put into a current vaccine would not pan out. Then, after the pandemic ends, drug companies will be left with the portfolios and pipelines they built before the virus took hold.

Fortunately for AbbVie and its shareholders, the company's portfolio was already impressive. Its cancer-fighting drug Opdivo ranks as one of the world's 10-best-selling drugs, and Evaluate Pharma estimates that its Humira will hold its place as the world's best-selling drug ever through 2024. Even Humira's deteriorating patent protection won't necessarily mark the end of the franchise's value to AbbVie, which also co-owns Imbruvica with Johnson & Johnson. That's another top-10 drug.

It's the sort of product base that not only drives recurring revenue and earnings, but has helped drive 47 consecutive years' worth of dividend payout growth from AbbVie. The chart below puts the recent past and foreseeable future in perspective. Per-share earnings are about twice the amount being paid out in per-share dividends, leaving plenty of leftover income to invest in drugs that continue driving revenue growth...a virtuous cycle.

AbbVie (ABBV) earnings, revenue, and dividends, past and projected

Data sources: Thomson Reuters/Refinitiv. Chart by author.

Investors have undervalued Duke Energy

Current dividend yield: 4.8%

It's not surprising to see a  utility stock on a list of dividend payers to consider owning; they're ideal income-oriented companies simply because their customers have to pay their electricity bills every month. What's unusual about Duke Energy's (DUK -2.77%) earning a spot on this particular list is the fact that, more often than not, utility stocks perform like bonds, rising and falling so that their dividend yields reflect the prevailing interest rates at the time. Right now, interest rates remain near or even at record lows, but Duke's yield hasn't followed suit because its stock hasn't risen to push its yield downward. Just the opposite has been the case.

This is one of Mr. Market's mistakes that translates into opportunity for investors paying close attention to the situation. While Duke has and will encounter challenges stemming from the economic impact of the coronavirus pandemic -- like changing gas prices that alter its billing rates -- this is nothing new for the company. Nothing fundamental has changed about its business that generates recurring revenue. Ditto for its steady annualized earnings.

The graphic below visually makes this point. While changes to seasons prompt an ebb and flow in earnings and revenue, annualized, growth of both is reliable. Analysts are forecasting the same sort of dividend-driving growth going forward.

Duke Energy (DUK) earnings, revenue, and dividends, past and projected

Data sources: Thomson Reuters/Refinitiv. Chart by author.

LyondellBasell isn't so tightly linked to energy prices

Current dividend yield: 6.6%

Add LyondellBasell (LYB -1.20%) to your list of buy-worthy dividend stocks presently paying out more than 4%. This chemical company currently yields 6.4%.

LyondellBasell shares haven't done particularly well this year, which is the key reason its yield is now so high. They're down nearly 30% from their February peak, thanks to the global coronavirus outbreak (and an April downgrade from Bank of America rooted in margin concerns), and are off by almost 40% from their November high. Investors have largely lumped the stock in with oil stocks and the chemical companies linked to the energy industry by virtue of supplying refiners and drillers with the consumables needed to extract oil and create fuel.

Connecting only those energy-related dots is a sizable mistake, though. Refining supplies accounted for about one-fourth of last year's sales, while oil intermediates and derivatives made up almost another one-fourth of its top line. Polymers and the olefins used to make plastics and some feedstocks make up about half of its business, and those markets' prices aren't quite as volatile as energy prices are. Usage of those plastic-making chemicals is even more consistent than their generally stable prices. Put it all together and what you've got is a misunderstood company that investors have unduly punished.

The revenue history and forecast shown in the chart below show a recent deterioration will likely persist through 2022 according to analysts' mean forecasts. That will likely prove a continued drag on per-share profits. But, even then, LyondellBasell is expected to keep earning more than its anticipated dividend payout once the coronavirus dust settles.

LyondellBasell (LYB) earnings, revenue, and dividends, past and projected

Data sources: Thomson Reuters/Refinitiv. Chart by author.

James Brumley has no position in any of the stocks mentioned. The Motley Fool recommends Duke Energy, Johnson & Johnson, and Verizon Communications. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
$38.93 (-1.49%) $0.59
Duke Energy Corporation Stock Quote
Duke Energy Corporation
$100.84 (-2.77%) $-2.87
LyondellBasell Industries N.V. Stock Quote
LyondellBasell Industries N.V.
$72.20 (-1.20%) $0.88
AbbVie Inc. Stock Quote
AbbVie Inc.
$141.21 (-1.29%) $-1.85

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

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