The market correction has investors scrambling to find safe stocks. There aren't too many stocks out there at the moment that are avoiding losses, but there are several dividend stocks that are holding up relatively well. These stocks generate returns that include periodic cash flows to investors, even if their stock prices are down temporarily, which makes them popular.
Let's take a closer look at three of these stocks that happen to have high dividend yields right now and see if we can help potential investors determine if they are great deals or value traps.
1. AT&T
Telecom giant AT&T (T -1.37%) cut its quarterly dividend in half last month, and it's currently yielding 5.2%. The company had become somewhat bloated and debt-laden, and it's in the midst of a strategic turnaround to reduce some of that financial leverage while focusing on its more promising business units. The divestiture of business and struggles in its business telecoms division led to a 13% decline in revenue last quarter. Even its relatively promising mobility segment is only growing 5.5% annually.
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This just isn't a business with much growth potential. That's fine, but it limits the upside available, which makes it tough for investors to get excited. It also threatens the company's ability to increase dividends meaningfully in the future. The stock's payout ratio looks sustainable at 65%, but its free cash flow was about $3 billion lower than its cash dividends paid in the most recent quarter. That's probably not sustainable in the long term.
AT&T can't offer much to excite long-term investors, but it's a reliable dividend payer in the short term. It could be a good investment for income investors who want limited downside risk for the next year or two.
2. Western Union
Western Union (WU -2.21%) is a financial services business that became closely associated with its international money transfer services. The company is experiencing major challenges as its core markets are disrupted by fintech newcomers, and many investors have lost faith in its economic moat.
Company management is forecasting a 10% decline in revenue for the full year 2022. Its consumer segment is struggling, and these effects are being seen across nearly every geographic region. Western Union is taking steps to address the competition with technology improvements and price reductions. That still might be a small bandage over the enormous threat posed by the likes of PayPal Holdings' Venmo, Block's CashApp, or a wide range of crypto-enabled transfer platforms.
To make matters worse, Western Union has a lot of debt. It repaid $300 million worth of borrowings last quarter, while it produced around $180 million in free cash flow. The $90 million paid in dividends seems manageable relative to profits (the payout ratio is 41%), but the picture is less encouraging when debt is considered.
For the time being, Western Union will pay you a nice $0.94 per share per year dividend that yields 5.3%, but there are serious concerns about the company's competitive viability in the next few years. Be careful that you don't get stuck holding the bag on this one.
3. Cracker Barrel
The Cracker Barrel Old Country Store (CBRL -0.62%) is a chain of novelty restaurants that are well known among people who have been on road trips along the nation's interstate highways. Its operations were disrupted substantially by the pandemic, but things are getting back to normal. The company is delivering slow sales growth over the medium term. Like other restaurant and hospitality businesses, Cracker Barrel is struggling with inflated labor costs and food expenses, but its margins are holding up for the most part.
The stock's 5.1% dividend yield would suggest that its payout is jeopardized, but it looks pretty safe. The company isn't likely to grow quickly, but the cash flows seem stable and it pays an annual dividend of $5.20 a share. Its free cash flow last quarter was sufficient to support its dividend payout and its debt obligations (its payout ratio is a sustainable 38.9%). Cracker Barrel's 11.4 forward price-to-earnings ratio also removes risk, which should catch the eye of value investors.
There's nothing very exciting about Cracker Barrel stock, but it could be an interesting cash flow play for investors who are looking for options to ride out the market downturn.
