With bank accounts offering little interest, investors have often turned to dividend stocks for income. While the average dividend yield stands at 1.5% for the S&P 500, some stocks offer cash returns above 5%. To this end, Chevron (CVX -1.10%), Lumen Technologies (LUMN 14.41%), and Omega Healthcare Advisors (OHI -1.67%) not only pay more than 5% but also hold tremendous potential for maintaining high-yielding, stable dividends.
Chevron has become one of the largest, most diversified energy companies in the world. Though it also operates an industrial lubricants business and has increasingly explored alternative energy, Chevron derives its profits from producing, processing, and selling oil and natural gas.
During the pandemic, it also gained an advantage over archrival ExxonMobil (XOM -1.50%). Both sustained losses amid low oil demand during the pandemic. During this time, ExxonMobil and Chevron increased total debt by $21 billion and $17 billion, respectively.
However, Exxon increased debt and cut back capital expenditures to raise cash when it needed to reverse production declines. In contrast, Chevron's debt shot higher in part because it assumed $9.4 billion of Noble Energy's debt in the acquisition of that company. That deal increases the company's proven reserves by 18%. Also, the company believes it will increase free cash flow and earnings per share within one year, meaning the increased debt could pay off long term.
Moreover, Chevron said on its Q4 2020 earnings call revealed that its breakeven price on Brent crude is under $50 per barrel. Brent trades at close to $64 per barrel as of the time of this writing, implying Chevron should again turn profitable.
Furthermore, Chevron increased its dividend for the 33rd consecutive year in 2020, and its annual payout of $5.16 per share yields about 5%. The oil giant generated $1.7 billion in free cash flow in 2020.
Indeed, it fell short of generating enough cash to fund its $9.7 billion in dividend costs in 2020 due to COVID-19. However, investors should remember that Chevron generated $13.1 billion in 2019 before the pandemic, more than enough to finance the payout. Also, a recovery from the pandemic and its $5.6 billion in existing cash will likely help keep the dividend viable.
Moreover, despite the rising debt, the debt ratio remains 23%, a level at which the company can maintain balance sheet stability. Additionally, despite rising debt, lower rates allowed interest and debt expenses in 2020 to drop by $100 million from 2019 levels. This indicates that the rising debt does not directly threaten the dividend.
Given these conditions, one can understand why Warren Buffett just revealed a major new stake in Chevron.
Massive changes in telecom technology once endangered the future of Lumen Technologies (LUMN 14.41%), formerly CenturyLink. Lumen owns more than 450,000 miles of fiber for broadband communications across the world. However, its customer base eroded as onetime subscribers cut the cord on their landline telephones and pay-TV services in favor of wireless phones and internet streaming.
Nonetheless, the company has repurposed this fiber to provide cloud services, security solutions, and collaboration tools to its clients. Moreover, the wireless technology that appeared to threaten Lumen's business may instead bolster the company. Its fiber now links cells to one another within 5G wireless networks.
In various divisions, revenue mostly increased for broadband, IP and data services, and transport and infrastructure before the pandemic. This increases the likelihood that growth will resume and continue as the world emerges from the contagion.
This also gives Lumen hope for maintaining its $1-per-share annual dividend. At current prices, that dividend provides a cash return of just over 8%.
Given that yield, one might struggle to believe Lumen paid $2.16 per year in annual dividends as late as 2018. However, the smaller payout gave Lumen flexibility for debt refinancing and debt reduction. Although long-term debt declined by almost $3 billion from 2019 levels, Lumen still holds a staggering $29.4 billion in long-term debt. Still, interest expenses fell by more than $350 million to just under $1.7 billion. Also, the company forecasts that this expense will fall to less than $1.6 billion in 2021, which could boost free cash flow further.
Additionally, Lumen generated about $2.8 billion in free cash flow in 2020. Hence, it can easily cover the $1.1 billion annual cost of this payout and still retire more debt. Moreover, analysts forecast Lumen's offerings such as cloud, security, and 5G will experience double-digit growth rates through at least 2027. If free cash flows come in between $2.8 billion and $3 billion in 2021 as forecasted, Lumen could place itself on a path to increased financial stability, and possibly future payout hikes.
Omega Healthcare Investors
Omega Healthcare Investors, a real estate investment trust (REIT), operates skilled nursing facilities and senior housing facilities in the U.S. and U.K.
Aging baby boomers have fueled the rise in this industry. About 10,000 seniors per day age into Medicare. This has increased the demand for skilled nursing facilities and senior housing. In 2020, the REIT acquired three additional facilities to help meet this demand.
That trend boosted revenue in 2019 by 5% from year-ago levels. However, 2020 revenue fell by more than 6% from year-ago levels amid occupancy declines stemming from the pandemic. While management expects demographics to drive increasing demand in the long run, the pandemic still engenders uncertainty in the near term.
Nonetheless, the $2.68 per share annual dividend yields almost 7.1%, and its yield has mostly stayed above 6% during the last five years. The payout has steadily risen since 2003, and it had generated more than enough income to maintain dividend increases. Unfortunately in 2020, the $556 million in funds from operations income did not match the $612 million in dividend costs. Its cash reserves, now at just under $164 million, helped cover the shortfall.
That gap understandably may concern stockholders. However they should remember that COVID-19 numbers should fall as more seniors and healthcare workers take the vaccine. After the contagion recedes, demographics should help the company return to its pre-pandemic growth levels. Once that occurs, Omega Healthcare can maintain, and in time, continue its dividend increases.
The best of the three
All three stocks should continue to deliver dividend performance long term. However, if picking one, investors should lean toward Omega Healthcare.
With Chevron, the push toward alternative energy stands in contrast to its current source of profit, fossil fuels. Moreover, while Lumen has redefined itself, it has not yet returned to revenue growth. These challenges make Omega Healthcare with the guaranteed payout and demographic tailwinds all the more appealing.