Coca-Cola (KO 1.50%) pays investors a reliable dividend that yields about 3% per year. That's better than the 1.6% yield you can expect from the average S&P 500 stock. However, income investors can secure an even higher payout without taking on much more risk.
Three stocks that pay better than Coca-Cola does and that are relatively safe buys are Bristol Myers Squibb (BMY -0.27%), Royal Bank of Canada (RY -1.59%), and Verizon Communications (VZ -0.53%). They've all been doing well despite the COVID-19 pandemic. Here's a closer look at their recent results and why income investors don't need to worry about the sustainability of their payouts.
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1. Bristol Myers Squibb
Drug manufacturer Bristol Myers Squibb currently pays its shareholders a quarterly dividend of $0.49, a yield of 3.2%. Last month, the company also raised its dividend payments by 8.9%, marking the 12th consecutive year the company has hiked its payouts.
The healthcare stock is coming off an uninspiring 2020, falling 3% while the S&P 500 rose by more than 16%. However, that could make the stock an underrated buy today as it's trading at a forward price-to-earnings (P/E) ratio of just eight, a bargain compared to the typical stock on the Health Care Select Sector SPDR Fund, which trades at more than 24 times earnings.
Bristol Myers strengthened its line up of products after the acquisition of Celgene, which gave it access to the sales growth of multiple myeloma drug Revlimid. Through the first nine months of 2020, Bristol Myers reported revenue of $31.5 billion, which is 72.8% higher than the $18.2 billion it generated during the same period in the previous year. The company credits the acquisition of Celgene for driving much of that growth. Revlimid, in particular, played a big role and contributed $8.8 billion in revenue -- more than 28% of the company's top line.
Although earnings of $1 billion are far lower than the $4.5 billion the company reported from the prior-year period, integration and other acquisition-related expenses clearly weighed down its bottom line. Its profits should become stronger in future quarters as the two companies find ways to eliminate redundancies and reduce costs. Bristol Myers projected in 2019 that the acquisition would help generate annual cost synergies totaling $2.5 billion by 2022.
Bristol Myers' payout ratio is currently negative due to its rising expenses this year. But historically, it's normally been about 80% or lower. And when looking at free cash flow of $11.7 billion over the trailing 12 months and dividend payments of just $3.7 billion during that time, Bristol Myers has plenty of room to continue paying and increasing its dividend. Cash flow can sometimes be a better indicator of a company's ability to make dividend payments, especially when non-cash items like amortization can weigh down its bottom line. With the inclusion of Celgene, the company's business is even stronger and a more attractive buy for long-term investors who are looking for some stable, recurring income over the years.
2. Royal Bank of Canada
Another safe dividend stock is Royal Bank of Canada. It's not often that you can lock in a great yield with a top bank stock, but that's exactly the situation investors can take advantage of right now. With a dividend yield of around 4%, RBC pays you more than Coca-Cola does while providing you with lots of safety as one of Canada's top banks.
Its stock didn't perform terribly well in 2020, rising just 4%, as investors were down on financial stocks for much of the year. Although concern surrounding the Canadian and U.S. economies has negatively impacted big banks, RBC has proven to be fairly resilient. Over the trailing 12 months, it posted a profit of 11.1 billion Canadian dollars. Its free cash flow during that time (CA$136.2 billion) is also well in excess of the CA$6.3 billion that it paid out over the past 12 months. RBC's payout ratio, which is based on income rather than cash flow, sits at 55%. It has been consistently raising its payouts since 2011.
The one wrinkle for U.S. investors is that with RBC's dividend in Canadian dollars, there will be some fluctuation in payments due to exchange rates. However, this is still a solid dividend stock to hold that can pay you a great yield while providing lots of long-term stability.
3. Verizon Communications
The highest yield on this list belongs to telecom giant Verizon, which today pays its shareholders a yield of 4.3%. In September, it hiked its dividend payments for the 14th year in a row, from $0.615 to $0.6275.
It may not be as safe as a bank stock, but telecom is also a pretty safe sector. Although the pandemic has made the past year a tough one for many companies, Verizon is optimistic about the future. On Oct. 21, 2020, the company released its third-quarter earnings for the period ended Sept. 30, 2020, and while consolidated operating revenue of $31.5 billion declined 4.1% from the prior-year period, Verizon raised its guidance for the full year. Previously, the company was expecting to see adjusted earnings per share (EPS) growth range between negative 2% and 2%. Now, however, it doesn't anticipate any loss, and is projecting EPS to rise between 0% and 2%.
But cash is what matters to dividend investors, and here, too, Verizon is showing some great strength. In Q3, its year-to-date operating cash flow was $32.5 billion -- up $5.7 billion from a year ago. And with Verizon paying $10.2 billion in dividends over the past 12 months, it's still in a great position to continue making those payments. Its payout currently makes up 56% of earnings. The stock fell more than 4% last year and it could be another great buy, especially as there is reason to be optimistic about a recovery in the economy with multiple COVID-19 vaccines now available that could help bring some sense of normalcy back to day-to-day life.
