With the world thrown into chaos because of pandemic, high-growth tech stocks have been all the rage in 2020. But it doesn't mean that investing in more mature dividend-paying companies is dead. On the contrary, some are doing quite well and are still generating ample profits to cover their investor paydays. Three that our Fool.com contributors think are buys before the start of 2021 are Comcast (CMCSA 0.06%), Broadcom (AVGO 2.62%), and Lumen Technologies (LUMN 4.04%).
A hated (but essential) cable company's forgotten media business
Nicholas Rossolillo (Comcast): Comcast isn't exactly a beloved business. Many consumers lament being locked into its Xfinity internet services due to lack of competition. Regardless of your feelings on the company, though, it's a solid business that provides a modern staple. And thanks to a couple million net new high-speed internet connections this year and nearly 800,000 new wireless phone connections (Comcast piggybacks off of Verizon's network), Comcast has been a solid stock to own in 2020. Shares are up 16% year to date following strong third-quarter performance.
In fact, these growing internet and related connectivity services are what have kept Comcast's dividend a stalwart investment even during the pandemic. Shares currently provide an annual yield of 1.8%, but the shareholder payout ate up only 30% of the company's free cash flow generation (revenue minus cash operating and capital expenses) through the first nine months of 2020. As effects from COVID-19 wear off, there's plenty of room for dividend payment increases in the years ahead.
Image source: Getty Images.
Further bolstering the case here is that Comcast's NBCUniversal segment has been a drag. Movie theaters are mostly closed, theme parks are closed or open to limited guests, and the 2020 Summer Olympics in Tokyo was delayed until 2021. Suffice to say, it's been a tough year for the media segment. And even though NBCU sales account for just over a quarter of total Comcast revenue, they nonetheless put a damper on the business overall.
I think that will change in dramatic fashion next year. The movie and theme park segments are a bet on the gradual reopening of the global economy, and the Universal Studios Beijing park is also set to be completed the first half of 2021. Construction of that park alone cost over $1 billion in the last nine months, so once finished that's additional capital freed up for Comcast.
Put simply, this is a rock-solid dividend stock that provides a kick of business growth as well. Even after solid performance this year, shares trade for a reasonable 17 times trailing 12-month free cash flow. I remain a buyer as 2020 comes to a close.
Exciting growth plus a 3.3% dividend yield
Anders Bylund (Broadcom): Semiconductor giant Broadcom is a unique beast. The stock offers a dividend yield of 3.3%, which is generous in any industry and downright exorbitant in the dividend-averse tech sector. At the same time, Broadcom is staring down several exciting growth markets such as 5G wireless networking, connected cars, and industrial automation. Broadcom investors get both a powerful dividend stock and a high-octane growth story, all rolled into one ticker.
Through a mixture of strategic acquisitions and its own research efforts, Broadcom has become a market-defining name in all the fields I mentioned above, and then some. The growth story isn't new, and Broadcom's strong dividend policy followed naturally. Management's approach to capital allocation calls for returning roughly half of Broadcom's free cash flow to shareholders in the form of dividends. That commitment has resulted in the following shareholder-friendly chart over the last five years:
AVGO Free Cash Flow data by YCharts
Broadcom is a good buy for pure income investors, a good buy for growth-stock chasers, and a rather unique opportunity for those who want both thrilling growth and wealth-building dividends.
A high-yield dividend stock that could be in for a rebound
Billy Duberstein (Lumen Technologies): For those seeking deep value stocks with material upside, Lumen Technologies is still looking attractive, even after the market's furious recent rally. Its dividend yield stands around 9.3% and is covered about three times over by adjusted free cash flow.
Lumen trades only around 3.5 times that adjusted free cash flow figure -- an incredibly cheap price, especially by today's standards. The company's irreplaceable global fiber network serves various types of customers, supplying businesses, governments, and consumers of all stripes. However, Lumen also has a portfolio of legacy technologies, such as landline phones and older copper-based broadband, which are declining. During COVID-19, its international, wholesale, small business, and consumer divisions all declined as well.
However, Lumen's top-line revenue declines are decelerating. Last quarter, revenue fell 3.4%, compared with 4.8% declines in the year-ago quarter. Additionally, the company actually grew revenue in its enterprise segment, the largest of its business lines. Adjusted EBITDA has remained relatively stable, as the company continues to reap more synergies from its 2018 acquisition of Level 3 Communications. Sure, these aren't exactly great revenue numbers, but even a stabilization in the revenue trajectory would be a big positive for the stock, given its bargain-basement valuation.
Meanwhile, as Lumen continues to pay down debt to the tune of about $2 billion per year, the stock should benefit. Not only is the company chipping away at its large debt load, but this era of low interest rates is allowing it to refinance older high-yield debt with new notes at much lower rates. It expects to pay only $1.64 billion in interest expense this year, down from $2.02 billion last year and $2.18 billion in 2018.
Lumen's high debt and revenue struggles make it a high-risk tock. Yet CEO Jeff Storey is an accomplished telecom executive, and he's slowly turning around this large ship, which takes time. If Lumen's newer fiber products eventually enable results to stabilize, that mouthwatering dividend should be remain safe. And if the company ever returns to top-line growth, Lumen's stock could soar.
