Let's face facts. Ultra-low interest rates intended to stimulate the economy are having an effect on dividend-paying stocks as well. The S&P 500's aggregate dividend yield right now is a modest 1.6%. That yield is significantly below the norm of 2% or so since 2000, and it's the absolute lowest dividend yield since 2004.
Don't count Altria Group out just yet
Dividend yield: 8.0%
Even if you don't recognize the company's name, you'll certainly know its products. Marlboro, Virginia Slims, and many other cigarette brands are made by Altria's Philip Morris USA subsidiary. Altria also owns stakes in Anheuser-Busch InBev, e-cigarette company Juul, cannabis company Cronos Group, and a few other businesses that specialize in vices.
These are all tough markets to be in, for obvious reasons. These products are, on balance, not good for you. The anti-smoking movement is gaining traction (particularly in the U.S.), and while smokeless tobacco and other alternatives were meant to attract new customers to replace those that Altria was losing, more consumers are balking at prospective health risks these days. Sooner or later, this company just won't have much of a viable business.
That said, Altria Group's management has done a great job of making sure that "sooner or later" will be much, much later. For example, the Philip Morris International-licensed IQOS 3 electrically heated tobacco system was just approved by the Food and Drug Administration for sale by Altria in the United States. While the FDA has been clear that the heat-not-burn devices are not risk-free from a health perspective, it did allow Altria to market the previous model IQOS 2.4 as a "modified risk" device, based on data that shows that users are exposed to smaller amounts of harmful chemicals than people smoking traditional cigarettes. Nearly 12 million people across the globe have switched from cigarettes to IQOS devices.
Because of this and other adaptations, Altria's dividend is protected well enough for the foreseeable future. The current annualized payout of $3.44 is only about three-fourths of the per-share earnings analysts have modeled for the current year. That earnings outlook, by the way, is expected to be an improvement on last year's bottom line despite the pandemic.
Problems aside, AT&T remains a cash cow
Dividend yield: 6.8%
Yes, AT&T has plenty of problems, not the least of which is that potential buyers of its struggling satellite cable unit, DirecTV, are lowballing their bids. The Wall Street Journal recently reported the most recent offers for the pay-TV business are only "above $15 billion," including debt. The best rumored offer is still well below the $49 billion that the telecom giant paid for DirecTV back in 2015, when AT&T also assumed $18 billion worth of its debt. Its customer base and revenue have been shrinking most of that time too, which is one reason AT&T's share price has been losing ground since 2016.
Yet despite a myriad of headaches, AT&T has no problems whatsoever dishing out its dividend.
The fact is, while wireless service, cable television, stand-alone video streaming, and even movie-making are more or less commodities these days, they're commodities that still allow AT&T to be a cash cow, and a big dividend payer. Of last year's $181.2 billion worth of revenue, $48.7 billion of it was counted as operating cash flow, and nearly $28 billion of it was turned into net income. Cash flow and profits were both up a couple years in a row too. Even last quarter's pandemic-crimped operating earnings of $0.76 per share were more than enough to cover the dividend of $0.52 per share.
ONEOK remains a much-needed tollbooth
Dividend yield: 9.0%
Finally, while oil and natural gas pipeline operators and storage companies are not completely shielded from commodity price volatility, they are fairly well shielded from it. Transportation companies still have to purchase minimum amounts of automotive fuel even in the midst of lockdowns. Consumers still cook, take hot showers, and heat their homes with natural gas. The country's natural gas usage through September of this year, in fact, is only down about 1% from last year's levels. Its price doesn't alter demand.
Enter ONEOK, which helps drillers deliver natural gas from point A to point B. This year's oil price setback and subsequent stumble of natural gas prices took a toll on the company's financials, to be sure, but not nearly as much as the stock's 70% slide might suggest. Through the first three quarters of 2020, its revenue of just under $6 billion was only down 20% year over year, and operating income of $823 million was off by a digestible 43%. And the bulk of that setback was the result of a $604 million impairment charge from the first quarter, which was going to be booked regardless of the pandemic. Factoring that out of the equation, ONEOK would be about as profitable this year as it was at this point in 2019.
The key is the company's business model. It's effectively a tollbooth, collecting fees for every cubic foot of natural gas it pipes from one place to another, regardless of whatever deals the buyers and sellers have worked out. ONEOK hasn't failed to turn a full-year operating profit in over a decade, nor has cash-flow slipped into negative territory during that timeframe. Cash flow and operating profits in fact have doubled during this 10-year stretch, while the stock's dividend has improved at a compounded annual growth rate of nearly 8% over the past decade. Not bad.
Thing is, nothing's really changed about the company's operation or profit profile in the past few months.
Investors as a group forgot this dynamic in a big way back in March. They're starting to correct the mistake now though. The stock's up nearly 100% from its March low. But that's still only about half of its February peak price, which is why the dividend is still so juicy at 9%.