With growth stocks potentially reaching a near-term peak at the same time that a new calendar year is in sight (and potentially the end of the COVID-19 pandemic as well), now may be a good time to beef up your exposure to income-producing picks.
Sure, dividend yields are broadly below-average at the moment, reflecting ultra-low interest rates meant to stimulate the economy. But some dividend stocks are arguably undervalued, leaving them with above-average yields based on payouts that have remained surprisingly solid in some cases.
To this end, income investors looking for some dividend payers right now may want to consider Broadcom (AVGO -4.31%), Fifth Third Bancorp (FITB 5.93%), and AT&T (T 1.10%). These companies are well-positioned for whatever may lie ahead and are paying out some of what they earn to shareholders.
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1. Yes, Broadcom is a serious dividend stock too
Dividend yield: 3.2%
When investors think of dividend-paying stocks, telecom and technology name Broadcom usually isn't one of the first to come to mind. The company makes semiconductors that power everything from your computer to your smartphone to computer networks and more. It operates in what can be a cyclical, cutthroat business that requires constant innovation and reinvention.
Yet, somehow Broadcom manages to smooth out the prospective swings found in the industry. The company has managed to produce higher year-over-year revenue in every quarter since the middle of 2013, managing the acquisitions of PLX Technology and Emulex pretty seamlessly in that time. Operating income growth for the company hasn't held quite as steady, but it has remained respectable all the same.
More important, net income has held steady enough to more than adequately cover Broadcom's dividend payout. Despite headwinds created by the coronavirus contagion, the company has earned $5.40 per share for the quarter ending in early August, handily covering its per-share dividend payout of only $3.25.
There don't appear to be any threats to its dividend on the horizon either. Analysts are collectively calling for per-share earnings growth of nearly 16% next year, reaching $25.45. That's more than enough to cover its current payout, as well as prompt what would be a 10th consecutive annual increase of its dividend.
Not every great dividend name has to fit the typical mold.
2. Fifth Third isn't in dire straits after all
Dividend yield: 3.9%
Banks are suffering a double-whammy right now. Not only are record-low interest rates crimping the amount of money lenders earn on loans, a weak economy means borrowers are less likely to keep up with those loan payments. Government-mandated provisions for potential losses on loans soared among the nation's biggest banks during the second quarter, according to data from S&P Global Market Intelligence. In some cases, those provisions more than doubled as a percentage of the banks' total loan portfolios. Many banks' dividends were in question at the time, and for some, the Federal Reserve was capping dividend payouts.
Fifth Third Bancorp was no exception to this trend, earmarking $625 million for loan and lease losses during the first quarter, and $478 million in Q2. Both were well up from the loan and lease loss provision of $172 million set aside in the fourth quarter of last year.
Except, loans aren't souring as dramatically as these provisions suggested was going to happen. In fact, Fifth Third booked a $21 million credit last quarter for overestimated loan losses suffered since the contagion has rattled the economy.
Don't misread the message. About 0.8% of the bank's loans are now considered non-performing, roughly doubling from last year's levels. Investors were expecting much worse, however, sending the stock price for this name sharply lower earlier in the year. Even with the stock price rally since March's low, Fifth Third Bancorp shares are paying out a nearly 4% yield on a dividend that's grown steadily since 2011.
3. Ignore AT&T's recent headlines and look at the numbers
Dividend yield: 7%
Finally, this company has got more than its fair share of problems. Its DirecTV satellite cable TV business is proving to be more of a liability than an asset, while its Warner Brothers film arm remains stifled by the pandemic. Meanwhile, T-Mobile's recent merger with Sprint has turned the combined entity into a legitimate powerhouse, particularly on the 5G front.
All of these challenges, however, appear to be priced into AT&T shares -- and more. The stock's current dividend yield of 7% suggests investors see this name as an above-average risk. For perspective, the S&P 500's yield is on the order of 1.6% at this time, down from March's peak of 2.3%.
Largely lost in the sea of doubts surrounding AT&T right now: Despite all of these challenges, it's still more than covering its dividend payout.
While adjusted earnings of $0.76 per share last quarter were well below the year-ago comparison of $0.94, it was still well above the quarter's dividend payout of $0.52 per share. That degree of dividend coverage from AT&T's earnings isn't anything new or unusual either. Also lost in the headlines is the possibility that a partial or full sale of profit-pinching DirecTV could, while hurting revenue, actually improve overall margins. This would translate into an even bigger dividend cushion.
The clincher: AT&T is a Dividend Aristocrat, having increased its payout every year for the past 35. It stands to reason it will do everything in its power to maintain that title.
