Investors looking for dividend stocks in 2020 need to play a balancing act between yield and growth potential. More than in most years, high yields that we've seen in some real estate investment trusts (REITs) and restaurant stocks can be a warning sign that there's something fundamentally wrong with a company due to the effects of COVID-19. On the flip side, low dividend yields don't necessarily mean that a stock isn't a great dividend play long-term.
Given that backdrop, three dividend stocks stick out as buys this month. Verizon (VZ -0.10%), Microsoft (MSFT 2.22%), and Target (TGT -0.05%) have a lot going for them operationally and some great dividends to own long-term.
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Wireless isn't going anywhere
The wireless business is arguably one of the most stable in the U.S. today. Consumers are dependent on their wireless connections each day, and that creates a highly dependable business for investors. You can see below that revenue has been stable for the last five years and cash from operations has been about flat for the last decade. And over that time, the dividend has grown to the dividend yield of 4.3% we see today.
VZ Revenue (TTM) data by YCharts
Why is a company with flat results a great dividend to buy today? I think Verizon is just entering a new phase of growth.
5G networks are just starting to roll out and haven't yet had a material effect on revenue or the bottom line. But as the networks improve, it will provide multiple opportunities for Verizon to increase connections and revenue from customers. Home connections are possible with 5G, replacing fiber or cable internet, and the fast speed of 5G can enable new technologies like self-driving cars, augmented reality, and other cloud services. This should drive a rise in connections for Verizon long-term.
On top of the potential increase in connections, the merger of Sprint and T-Mobile reduced the number of competitors in the wireless market. That should lead to better margins in the future as competition is a little less fierce. All in all, I like Verizon's growth prospects, and this is a high-yield stock I would bet on long-term.
The backbone of businesses
Microsoft has made one of the most impressive transitions in the last decade, from a PC operating systems and productivity software company to one of the most critical business infrastructure companies in the world. The company's Microsoft 365 product is the backbone of corporate email, word processing, presentations, and much more. And the real growth is in the cloud.
In the fiscal first quarter of 2020, Microsoft's commercial cloud revenue jumped 31% to $15.2 billion as people used more cloud services, including the back-end cloud that powers companies' apps and services around the world.
As the world moves to more cloud computing services, Microsoft has made the transition better than many expected. Teams, the tech giant's group chat and videoconferencing service, is now a standard product for large corporations, in addition to its valuable infrastructure for new companies building apps and online services. The dividend yield of 1.1% may not be high, but Microsoft has $138 billion of cash on the balance sheet and generated $19.3 billion from operations just last quarter. This dividend has a lot of growth potential ahead, and that's what makes it a great buy today.
The future of retail
When the pandemic hit, it would have made sense if retailers like Target had struggled to adapt. But the company has become one of the more innovative retailers during the pandemic, leveraging its delivery service Shipt, Drive Up ordering, and online ordering with delivery to grow. And you can see that growth has accelerated since COVID-19 hit.
TGT Revenue (TTM) data by YCharts
This may not be an explosive growth stock, but it's a solid dividend payer with a 1.7% dividend yield. And the fact that it's shown how it can adapt to the pandemic and the future of online shopping has been impressive.
Target has shown that its brick-and-mortar stores have a place in the future of retail, and it's leveraging that position to add more convenient online solutions. That's why this is a dividend stock worth owning, even as more shopping goes online.
Yield isn't the only number to look at in dividend stocks
You can see from this list that great dividends can come from a diverse group of industries and companies. But what they have in common is a stable business that's growing and solid cash flow coming from that business. Those are great attributes for dividend stocks and why Verizon, Microsoft, and Target are on the top of my list in November.
