Sometimes in investing, the simplest answer is the right one. In today's market, I'm trying to make simple decisions and I'm asking questions like: Is a company profitable? Does it pay a dividend? Will people buy its products even if they have to cut back spending a little?
Three companies that have positive answers to all of these questions are Apple (AAPL 0.42%), Verizon Communications (VZ 1.48%), and ExxonMobil (XOM 2.04%). These may not be growth stocks, but they're great dividend stocks that won't blow a hole in your portfolio.
Apple isn't known as a great dividend stock, but maybe it should be. The company is likely past its higher growth days, and now it's monetizing the computing platforms that have been developed and attracted hundreds of millions of users worldwide. You can see below that as Apple has focused on expanding from hardware to high-margin software and products that lock in customers, free cash flow has surged to over $100 billion per year.
Despite paying a modest dividend, Apple could do much more. The stock only yields 0.6% today, but that's in large part because management only pays out about 15% of earnings as a dividend. The payout could triple and still be a comfortable payout ratio, and leave plenty of room for buybacks with excess cash.
I see Apple as having one of the best businesses in the world and it's a cash flow machine, which means there's great upside for this dividend stock.
No growth but big dividend stock
Investors don't generally like high-capital-expense businesses like Verizon, but it may be time to take another look. The U.S. wireless market has only three major competitors with AT&T (T 0.53%), T-Mobile (TMUS 1.23%), and Verizon, with Verizon having arguably the best network of the three. This puts it in a strong position to generate strong cash flow long-term.
While second-quarter earnings results showed disappointing results in the value segment of the wireless market, there were bright spots in business and fixed wireless (wireless broadband). Verizon added 256,000 fixed wireless connections, up 32% from a quarter earlier.
There are ups and downs in the wireless business, and right now there's a downtrend for Verizon's overall business. But that's an opportunity for investors to buy a stock that has a dividend yield of 5.6% and a price-to-earnings (P/E) ratio of 8.8. Wireless isn't going anywhere, and Verizon is one of only three major service providers. Given the value in the stock, this is a simple dividend buy today.
The future of oil is cash flow
The oil business is relatively simple today. Executives know a threat from electric vehicles is coming, so they're being more prudent in their capital spending, despite high oil prices. In other words, cash generation is up sharply with oil prices, but they're not rushing out to "drill baby, drill."
ExxonMobil may not be a growth play anymore, but it's a great value stock with a P/E ratio of 15.4 and a dividend yield of 3.8%. Management's conservative operations led to a $4.3 billion increase in cash on the balance sheet while returning $5.8 billion to shareholders and reducing debt by $0.7 billion.
The world is going to be using oil and natural gas for a long time, even if clean energy and electric vehicles continue to take market share. ExxonMobil may not grow as a result, but it's a great cash flow company and it pays a nice dividend, which has been a recipe for great returns long-term.
Keep it simple
Apple, Verizon, and ExxonMobil may not be great growth stocks, but they don't have to be to beat the market. They all generate solid cash flows and they're in businesses that are sticky whether the economy slows or inflation continues. That's why I think they're great buys for dividend investors today.