Over the past few years, with market multiples at or near all-time highs, it has been incredibly difficult to find quality businesses with strong dividend yields. In fact, over the last few decades, the S&P 500's average dividend yield has rarely gone above 3% (it's currently 1.37%). This is atypical compared to the rest of the market's history and has forced many investors searching for income in their portfolios into other parts of the financial world like real estate.
However, with the market indexes sliding in 2022, there are now more opportunities to buy dividend-paying stocks with higher yields. Here are two stocks to buy right now with dividend yields above 3%.
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1. Intel: 3.35% yield
Intel (INTC -1.79%) is one of the largest semiconductor manufacturers in the world, with a market cap of $178 billion. The stock has wavered over the past few years because of increasing competition from Taiwan Semiconductor Manufacturing (TSMC), a manufacturing foundry that focuses solely on chip production and lets its customers do the designing (Intel does both). This competition has disrupted Intel and usurped it from the top of the computer chip market. In response, Intel brought in CEO Pat Gelsinger in February 2021 in an effort to get things back on track.
Gelsinger's plan is to increase Intel's capital expenditures on new manufacturing plants across the United States and Europe -- to not just build its own chips but also compete with TSMC as a manufacturing foundry. It plans to spend $20 billion each on manufacturing plants in Arizona and Ohio and commit 17 billion euros to a manufacturing facility in Germany.
The bull thesis on Intel is simple. Semiconductors are growing in demand worldwide, and Western governments want more capacity in their home regions, given the concerns around China in East Asia. The United States government is giving out $52 billion in subsidies for semiconductor companies to build capacity in the United States. A lot of this should go to Intel, giving them a great boost as they try to catch up with the global competition.
Over the last 12 months, Intel has generated $30 billion in operating cash flow. The majority of that cash is going into capital expenditures, estimated at $27 billion just in 2022, and the rest goes to fulfill its 3.35% annual dividend yield. With government subsidies, a large cash position of $40 billion, and a business that is still generating tons of cash each year, Intel is in the pole position in the race to be the West's semiconductor champion. And at a trailing price-to-earnings ratio (P/E) below 10, this makes the stock a buy right now.
2. AT&T: 5.65% yield
We all know AT&T (T 1.30%), one of the largest telecommunications companies in the world. It owns wireless and broadband internet assets and is one of the three big mobile phone players in the United States, along with Verizon and T-Mobile. It has 67.5 million mobile phone subscribers and 6.3 million AT&T Fiber subscribers.
These large customer bases generate stable profits for the company. In 2021, the combined divisions generated $22 billion in operating income. Compared to its market cap of $141 billion, the stock has a price-to-operating income (P/OI) of 6.4. This seems very cheap but is not how investors should value AT&T stock. Why? Because of the massive debt load on its balance sheet.
At the end of Q1, the company had $27 billion in debt maturing this year and $180 billion in long-term debt maturities. This pushes AT&T's enterprise value up to $310 billion, much higher than its stated market cap.
This debt load is concerning, but AT&T is making a big move to help alleviate the burden. In April, it completed its spinoff of Warner Media to create Warner Bros. Discovery in a $50 billion-plus deal that reduced its net debt by $40 billion. According to management, the deal will help AT&T focus on its core business by investing $24 billion in its telecommunications businesses in each of the next two years while also maintaining dividend payouts of around $8 billion a year.
Given how durable mobile phone/internet plans are, I don't think investors should be concerned with AT&T's debt after this successful spin-off of its media division. If it pays out around $8 billion in dividends each year, that is a yield of 5.65%, providing a steady stream of income for investors looking to hold for the long term. Don't expect AT&T stock to 10x over the next decade, but if all you're looking for is some steady dividend payouts, this could be a good stock for you.
