This is a guest contribution by Bob Ciura of Sure Dividend.
With interest rates on the decline, income investors are once again put in a difficult position. Lower rates have caused yields across the spectrum of stocks and fixed income to fall. While investors have enjoyed the strong returns of the S&P 500 over the past several years, the average stock in the index now yields less than 2%.
As a result, investors who rely on stocks for income have to search harder for high yields. Fortunately, there are still many high-dividend stocks that provide much stronger levels of income than the S&P 500. The following 3 stocks each have dividend yields above 5%, and we believe their dividends are secure.
High-Yield Stock #1: AT&T Inc. (T)
AT&T is a telecommunications giant, with a market capitalization of $285 billion. It offers a wide range of telecom services such as Internet, video and wireless. It also owns the DirecTV satellite television business. AT&T has long been known as a reliable dividend growth stock. It has raised its dividend for 36 consecutive years. Plus, the stock currently has a high dividend yield of 5.4%.
Telecom stocks are typically considered slow-growth companies. 2019 was another year of steady results. Adjusted earnings-per-share increased 4% growth in the third quarter, and by slightly less than 1% over the first three quarters.
While AT&T certainly generates consistent cash flow, it also has a major growth catalyst in the form of its Time Warner acquisition. By acquiring Time Warner, AT&T now owns multiple popular media properties including HBO and CNN. It also owns the Warner Bros. studio. The deal presents strategic benefits for AT&T.
As a content distributor, AT&T was at risk of “cord-cutting”, in which people cancel their high-priced cable bundles in favor of cheaper streaming options. This poses a significant risk for AT&T’s legacy cable and DirecTV businesses. However, now that AT&T owns content, it has a valuable hedge against the risk of cord-cutting. It can also offer unique packages with its strong content lineup, to further reduce customer churn.
AT&T expects approximately 10% growth in adjusted EPS per year, through 2022 at the midpoint of management guidance. Revenue is expected to increase 1% to 2% each year, while cost synergies are likely to fuel margin expansion. AT&T expects free cash flow of $30 billion to $32 billion by 2022, which will allow the company to pay down debt from the Time Warner acquisition, and pay dividends to shareholders.
AT&T currently has an annualized dividend payout of $2.08 per share. With expected adjusted EPS of $3.65 for 2019, AT&T has a dividend payout ratio of 57%. The dividend payout is highly secure, with room for continued dividend increases.
High-Yield Stock #2: AbbVie Inc. (ABBV)
Our next top high-yield stock is AbbVie, a pharmaceutical company that was spun off from Abbott Laboratories in 2013. AbbVie was separated from its parent company so that it could focus on its own strategic initiatives, with its own dedicated management team. The results speak for themselves—from 2013 to 2018, AbbVie grew revenue and adjusted earnings-per-share by 12% and 20% each year, respectively.
AbbVie is facing some uncertainty regarding its future growth, as its flagship drug Humira will lose patent exclusivity in the U.S. in 2023. Humira is the company’s largest product by far, comprising more than half the company’s revenue in 2019. But this exposes AbbVie to patent risk, as the negative impact from biosimilar competition is significant. Humira has already lost patent exclusivity in Europe, which caused international Humira sales to fall by 29% over the first three quarters of 2019.
Fortunately, AbbVie has prepared for this outcome by investing heavily in its own pipeline. AbbVie spent over $5 billion in research and development in 2017 and 2018, to develop its own portfolio of next-generation products. This spending is paying off, as the company has a number of strong products in its pipeline. For example, Imbruvica sales increased by 30% through the first three quarters of the year. Venclexta sales more than doubled in the same time.
Overall, AbbVie’s adjusted earnings-per-share increased 12% over the first three quarters of 2019. This growth bodes well for the future. In addition, AbbVie’s growth will be accelerated by the $63 billion acquisition of Allergan (AGN), whose therapeutic areas include medical aesthetics, eye care, central nervous system, and gastroenterology. Allergan’s key product is Botox.
The acquisition diversifies AbbVie’s portfolio by adding exposure to cosmetic products. Post-acquisition, AbbVie expects to generate annual revenue of nearly $50 billion. The company also expects the acquisition to boost its adjusted EPS by 10% in the first year.
Thanks to the contributions of AbbVie’s organic investments, as well as the Allergan acquisition, we are confident the company will be able to continue growing. In the meantime, AbbVie stock pays a current dividend yield of 5.5%. And, AbbVie is a Dividend Aristocrat, dating back to its days as a subsidiary of Abbott.
High-Yield Stock #3: Exxon Mobil (XOM)
Our last high-yield stock pick is yet another Dividend Aristocrat, oil and gas giant Exxon Mobil. Exxon Mobil is the largest U.S. energy company, with a market capitalization of $280 billion. Exxon Mobil has a high dividend yield of 5.2%, and the company has increased its dividend for 37 consecutive years. This is a highly impressive history of dividend growth, particularly since Exxon Mobil operates in a cyclical industry.
Exxon Mobil is an integrated major, meaning it operates across the full spectrum of the oil and gas industry. It operates an upstream exploration and production segment, a downstream refining unit, midstream transportation assets, and a chemicals business.
Exxon Mobil, alongside the broader energy sector, has struggled against weak oil prices in recent years. West Texas Intermediate crude oil currently trades at $56 per barrel, while Brent crude, the international equivalent, trades at $62 per barrel. This has put a dent in profitability across Big Oil companies. Last quarter, Exxon Mobil’s net income declined by 49% from the same quarter the previous year.
Still, Exxon Mobil has a positive long-term future. Aside from increasing commodity prices, Exxon Mobil will grow earnings from a number of new projects coming online. According to a recent company presentation, 550 billion barrels of new oil supply is required through 2040 just to meet the anticipated demand around the world. Exxon Mobil is ramping up multiple large projects globally, in the U.S. as well as major sites in Guyana, Brazil, and more. The company forecasts earnings to grow by more than $4 billion in 2020, even with flat commodity prices. If oil prices average just $40 per barrel, Exxon Mobil still expects to grow its earnings by approximately 40% from 2017-2025.
Exxon Mobil has a long history of navigating the ups and downs of the oil and gas industry. It has raised its dividend for over 30 years in a row, and the stock currently yields 5.2%. This makes Exxon Mobil an attractive Dividend Aristocrat for income investors.
Relevant Articles:
- AT&T: A High Yield Telecom for Current Income
- Dividend Aristocrats List for 2020
- Are Energy Stock Values Today a Once in a Lifetime Opportunity?
- The Energy Company I want to buy