The stock market boomed in 2020, recovering from a steep sell-off in March driven by the COVID-19 pandemic. The pandemic is nowhere close to under control. While widespread availability of vaccines may be just a few months away, there's a ton of uncertainty for investors, particularly with many stocks trading at sky-high valuations.
For investors looking to ride out whatever the stock market throws at them in 2021, safe dividend stocks may be the answer. Two dividend stocks that come to mind are Home Depot ( HD 0.01% ) and Cisco Systems ( CSCO 0.14% ). Both stocks pay dividends that easily beat the S&P 500, and both stocks trade for reasonable valuations.
Home improvement retailer Home Depot has thrived during the pandemic as consumers shifted spending from travel to home improvement projects. Comparable sales shot up over 24% in the third quarter; through the first nine months of the year, Home Depot added an additional $15 billion of sales compared to the same period in 2019.
This party isn't going to last forever. Once vaccines are widely available and travel spending picks back up, it's hard to imagine Home Depot continuing to repot such impressive results. And the company may even see sales temporarily contract, the result of consumers having pulled forward home improvement projects during the pandemic.
What won't change, though, is the safety of Home Depot's dividend. The company currently pays a $1.50 per-share quarterly dividend, which works out to a dividend yield of about 2.3%. That's certainly not the highest yield around, but it is higher than the paltry 1.6% dividend yield for the S&P 500.
That dividend is well covered by earnings and cash flow. Based on 2019 numbers, the current dividend eats up about 59% of both earnings and free cash flow. With analyst expecting earnings to rise substantially this year, the payout ratio will drop to just 51% based on the average analyst earnings estimate.
Home Depot's dividend is safe, but investors should be aware that the stock is a little on the pricey side, although not terribly so. Home Depot stock trades for around 22.5 forward earnings, which is not exactly bargain territory. And remember, the bottom line may not hold its ground once the pandemic is over if the company sees consumer behavior shift away from home improvement projects.
For dividend investors focused on the long term, Home Depot is a solid dividend stock. However, the near-term performance of the stock is anyone's guess.
Unlike Home Depot, networking hardware giant Cisco has been hit fairly hard by the pandemic. Cisco's enterprise and government customers tend to delay or pull back on spending when the economic outlook gets cloudy, and a once-in-a-century global pandemic is about as cloudy as it gets.
Revenue tumbled 9% in Cisco's latest quarter, and adjusted earnings per share plunged 10%. The good news is that Cisco now sees the light at the end of the tunnel – the company expects just a small revenue decline for its fiscal second quarter. Historically, Cisco tends to see strong demand recoveries following downturns as customers play catch-up. There's little reason to believe the same story won't play out this time around.
Cisco's $0.36 per-share quarterly dividend works out to a dividend yield of about 3.2%, just about double that of the S&P 500. With analysts expecting adjusted earnings per share of $3.17 in the current fiscal year, Cisco's payout ratio sits at a very safe 45%.
Cisco has another thing going for it: A depressed valuation. The stock trades for just 14 times the average analyst estimate for adjusted earnings, a low multiple for a company that dominates its core markets and enjoys some serious competitive advantages. If you're looking for a dividend stock with a high yield and a good shot at jumping in price once the market comes to its senses, Cisco should be on your radar.