Some dividend investors are willing to settle with low yields in hopes of dividend growth in the future, but other investors want higher income today. For those investors wanting a meaningful stream of income immediately, here are two solid dividend stock ideas with dividend yields above 3%: Verizon Communications (VZ -1.67%) and Intel (INTC -0.80%).
It's not easy to find a dividend stock with a yield well above 3% that also has the characteristics of a mature, reliable, cash cow. But this just about describes Verizon exactly. The company's 4.2% yield is mouth watering, and its formidable cash flow and consistent ability to lead U.S. wireless carriers in nearly all the industry metrics that matter highlight the company's powerful economic moat.
The first way to put a spotlight on why Verizon's high yield is sustainable is its payout ratio. Paying out just 51% of its earnings in dividends, the company's dividend has considerable wiggle room. Another way to look at the company's likelihood of sustaining its dividend is by looking at its free cash flow. Of its $11.2 billion in free cash flow during the past twelve months, the company paid out $8.5 billion in dividends, leaving excess free cash flow for other shareholder value-building activities.
Best of all, investors can tap into this yield today without overpaying for the stock. It has a surprisingly conservative price-to-earnings ratio of 12.4.
But does Verizon deserve a conservative valuation? Not by the looks of its financial history. The company has consistently averaged a gross profit margin around 60% -- a margin even substantially ahead of financially sound AT&T's gross profit margin of 54% in recent years. Further, it has generated well over $10 billion in free cash flow annually for the past seven years straight.
Intel's dividend yield of 3.3% is lower than Verizon's, but the company makes up for its lower yield in other areas.
The chip-maker's lower payout ratio of 41% is one particular area where Intel beats out Verizon. With such a low payout ratio, the company has plenty of room to maintain its dividend if it faces any unexpected headwinds. Further, this low payout ratio leaves room for increases in the future.
A range of metrics beyond its low payout ratio suggest the company's financial strength can sustain a dividend for years. Consider the company's trailing-12-month free cash flow of $11.6 billion. Of this free cash flow, the company paid out just $4.6 billion in dividends.
Like Verizon, Intel also has a conservative valuation relative to its stable position as a market leader in its industry. The company's price-to-earnings ratio is just 14.
With meaningful dividend yields, fat cash flow, and market-leading characteristics, Verizon and Intel stand out as two dividend stocks investors can count on to help generate solid income streams for years to come.