A good reason to invest in dividend stocks is the potential for capital gains. Quality stocks generate steady returns over time which means you will benefit from a stable stream of dividend payments as well as stock price appreciation over the long-term.
The current weakness in equity markets has increased the dividend yields of companies to attractive levels. Here, we look at three companies that have a yield of up to 7.3%, making them top picks at a time when interest rates are near record lows.
AT&T
Telecom heavyweight AT&T (NYSE: T) is the first stock on our list. Shares of AT&T are trading at $29.9, which is 25% below its 52-week high. This pullback has increased its forward yield to a juicy 7%.
The COVID-19 pandemic and the shift to digital streaming has hurt AT&T stock. The telecom leader owns DirecTV that has seen a steady decline in the number of subscribers over the last few quarters.
However, the upcoming rollout of 5G networks is a positive tailwind for AT&T as is its foray into online streaming with the launch of HBO Max. AT&T is spending billions to upgrade existing network infrastructure and accelerate the transition to 5G. It also aims to increase the number of HBO Max subscribers to 80 million by 2025.
AT&T has increased dividends for 36 consecutive years and has suspended its share buyback program. This means a dividend cut is unlikely and investors can double their bet in seven years from just its dividend payout.
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Kinder Morgan
The pandemic has wreaked havoc on several sectors. One of the worst hit sectors is the energy space that is grappling with low oil prices due to supply glut and tepid demand.
While oil stocks are expected to be volatile in the second half of 2020, you can look to buy quality pipeline companies such as Kinder Morgan (NYSE: KMI). Shares of Kinder Morgan are trading at $14.5, 36% below its 52-week high, which means its dividend yield stands at a healthy 7.3%.
Kinder Morgan recently announced its second-quarter earnings and reported adjusted EBITDA of $1.56 billion, down 13.7% year-over-year. Comparatively, its distributable cash flow per share fell 12% to $0.44.
Pipeline stocks including Kinder Morgan generate a majority of sales from fee-based contracts that result in predictable cash flows. While the ongoing weakness in oil prices will hurt KMI, it expects to generate $4.6 billion or $2.02 per share in distributable cash flow in 2020. This means its dividend payout ratio is 52%, given the company’s annual dividend payout of $1.05 per share. KMI has also reduced capital expenditure by $700 million to $1.7 billion this year, which will improve short-term liquidity, making its dividend payment sustainable.
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Broadcom
The third company on the list is Broadcom (NASDAQ: AVGO), which has returned a staggering 1,788% in the last 10 years. Notably, it also pays a dividend of 4.2%.
Broadcom is a semiconductor behemoth with a diversified portfolio. The company merged with Avago back in 2016 to expand its presence in the semiconductor space. It then targeted the high margin software business with its acquisition of CA Technologies in 2018 and Symantec’s enterprise software assets in 2019.
Broadcom has essentially relied on debt to fund its acquisitions, which might worry investors. However, it also generates enough cash flow to repay debt and pay investors a dividend. Broadcom’s recent results show that it managed to grow revenue by 4% in the pandemic hit quarter ended May 2020. This was due to a 21% increase in software sales offset by a 2% fall in semiconductor revenue.
It ended the quarter with free cash flow of $3.1 billion, meaning its dividend payout ratio is about 42% at $1.3 billion.
If you invest $5,000 each in these three companies, you can generate over $920 in annual dividend payments.
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