Dividend stocks are a great way to generate recurring cash flow for your portfolio and boost your returns in an off-year for the markets. They're also generally stable businesses that you can count on not to drive your initial investment higher. While they may not offer much in the way of significant sales growth, they are the types of investments that you can build your portfolio around and hold for the long haul.
Three stocks that are especially enticing buys today are Pfizer (PFE 0.76%), Bank of America (BAC 0.92%), and AT&T (T 1.27%). They all pay better than the 1.8% yield you'd get from the typical stock on the S&P 500. But that's not the only reason these companies look great. Here's a closer look at why you'll want to consider adding these three income-generating stocks to your portfolio today.
Pfizer is a great dividend stock that pays an attractive yield of 4.1% per year right now. If you were to invest $25,000 into the stock, you could expect to earn $1,025 over the next 12 months. In 2021, the company will be paying its shareholders $0.39 for each share that they own, which is up from $0.38 in 2020 and 30% higher than the $0.30 that it was paying five years ago in 2016.
Despite increased public attention, the stock's overall performance this year has been underwhelming. Its share price is down about 1% in 2020, while the S&P 500 has risen 14% year to date. But next year could be a stronger one for Pfizer, especially since on Dec. 11, the U.S. Food and Drug Administration (FDA) granted emergency use authorization to its COVID-19 vaccine.
The company has already secured a $1.95 billion deal for 100 million doses of its vaccine from the U.S. government, averaging a price of $19.50 per dose. But that price could change as there is an option for the government to purchase an additional 500 million doses and that would fall under a separate negotiation. The European Commission also agreed to purchase up to 300 million doses of Pfizer's vaccine, which the company has been developing with German company BioNTech.In that deal, the price per dose is $18.90.
Pfizer could get a big boost in revenue next year, which would be timely given that Pfizer spun off its business unit, Upjohn, and officially combined it with Mylan in November to form Viatris (VTRS 1.27%). Through the first nine months of 2020, the Upjohn segment, which included Pfizer's off-patent drugs, contributed $5.9 billion to the company's top line, or 16.5% of the $35.96 billion that the healthcare giant generated during the period. But Upjohn sales aren't growing and have declined by more than 30% year to date. Spinning off the business will allow Pfizer to deliver stronger growth numbers in the future by focusing more on its biopharmaceuticals segment -- which at $30 billion provides the bulk of its operations and has risen by 5.6% this year.
The company will have a busy 2021, and vaccine sales will surely give its top line a boost. In total, Pfizer says it can produce 1.3 billion doses of the vaccine next year and analysts project that will generate $19 billion in revenue for the company in 2021. Clearly, there are more reasons than just a high-yield dividend that make Pfizer a top healthcare stock.
2. Bank of America
Investing in a big bank is a great option if you're after dividend income. Bank of America currently pays its shareholders a dividend that yields 2.5% annually. Assuming that yield stays intact, a $25,000 investment here would bring in $625 in dividend income each year for your portfolio.
The top bank didn't raise its dividend this year amid the COVID-19 pandemic but has done so in prior years. Its quarterly payout of $0.18 is nearly four times the $0.05 that it was paying shareholders in 2015. However, it also cut its dividend during the financial crisis, and for years afterward, it kept its payouts to a minimum.
The bank didn't slash its payouts during the pandemic, and now with vaccines potentially slowing the spread of COVID-19, the worst may be over for the economy. And that could be great news for Bank of America and its stock, which is down more than 16% this year.
On Oct. 14, Bank of America reported its third-quarter earnings for the period ending Sept. 30. Net income of $4.9 billion was a 40% improvement from the second quarter, where profits were just $3.5 billion. A big reason for that is the company isn't building up massive reserves anymore. This is a sign that the bank believes it has provisioned enough for credit losses and the economy isn't looking a whole lot worse in the months ahead. In Q3, Bank of America's reserve build was just $0.4 billion, compared to $4 billion in Q2.
With a more positive outlook for the future, Bank of America stock not only looks like a great buy for its dividend, but its share price also could rally in 2021 if the economy continues its recovery.
AT&T could be a great third dividend stock to round out your portfolio. The telecom giant is the worst-performing stock on this list, down more than 25% year to date. And it's easy to be bearish on the stock this year, as sales of $126.1 billion through the first nine months of 2020 are down more than 6% from the same period last year, while profits of $8.6 billion have fallen by 26%.
While that may be concerning, what's important for dividend investors is cash flow. And year to date, AT&T's operating cash flow of $33 billion is more than sufficient to not just cover the company's capital expenditures of $13.3 billion, but also its dividend payments of $11.2 billion during the period.
Although its 7% dividend yield may look a bit high, it continues to be sustainable. The company hasn't raised its dividend payment in over a year, but on a $25,000 investment, you can earn still earn $1,750 annually from owning the stock if its payout remains consistent.
Next year could be a much stronger one for AT&T's business for three reasons:
- The continued rollout of its 5G network
- HBO Max subscribers are already at 38 million in the domestic market and ahead of the company's goal of 36 million
- Roaming charges will likely up in 2021 as a result of increased travel
And when you factor in AT&T's terrific dividend yield and reduced share price, it's easy to see why this is a solid stock to buy on the dip and add to your portfolio right now.