Dividend stocks are a great source of income. But in the wake of the current economic downturn brought on by the coronavirus pandemic, companies are cutting dividends.
Income investors must seek businesses with the financial fortitude to not only survive but to thrive in this environment. While few companies remain unscathed from the pandemic's impact, some remain resilient. These three companies exhibit the financial well being to make for excellent income stocks, and each offers dividend yields around 3% or higher as of the time of this writing.
IBM: 5.07% dividend yield
IBM (NYSE: IBM) offers a high-yield dividend, which it has raised for 25 consecutive years. The most recent increase came at the end of April, well into the depths of the pandemic, illustrating the company's confidence in its financial health.
Yet wary investors may wonder if the dividend is sustainable because the company is in the midst of turnaround efforts. Second-quarter revenue dropped 5.4% year over year. Even so, IBM can safely cover the dividend, with a payout ratio of 74%.
The company is also a cash machine, amassing $12 billion in cash and equivalents in the second quarter, along with free cash flow of $2.3 billion. Its client list includes telcos, financial institutions, and the public sector (such as government and healthcare). And these deep-pocketed industries make up the bulk of IBM's revenue.
Big Blue's prospects for long-term financial success look promising as it focuses on the red-hot cloud computing market. It generated total cloud revenue of $6.3 billion in Q2, up a strong 30% year over year.
IBM's expertise lies in the hybrid cloud niche, which combines a public cloud's lower costs from sharing computing resources across multiple customers with the security of a private cloud's dedicated IT infrastructure for sensitive data and computing processes. The hybrid cloud market is forecast to grow from 2018's $44.9 billion to $173.3 billion by 2025. As a result, IBM is poised to deliver years of growth, making it an excellent income stock, particularly for a retirement account.
PepsiCo: 2.98% dividend yield
PepsiCo (NASDAQ: PEP), the purveyor of popular snack food brands and beverages such as Quaker Oats and Gatorade, possesses a long dividend track record. This year marked its 48th consecutive year of dividend increases.
The company's resiliency lies in its diversified business. While the pandemic caused store closures, eating into its beverage sales, consumers flocked to its familiar snack and food brands as more food was consumed at home.
Second-quarter North American beverage sales, which accounted for $5 billion of the company's $15.9 billion total revenue, saw organic revenue drop 7% year over year. Meanwhile, food division Frito-Lay's North American organic revenue grew 6% and Quaker Foods rose 23%, contributing a combined $4.9 billion in sales.
Pepsico is so confident in its financial position that it expects to return $7.5 billion to shareholders this year in the form of dividends and share repurchases. The latter is significant given the number of businesses that stopped share buybacks to conserve cash.
Before the pandemic, Pepsico was doing well. It enjoyed 3.9% year-over-year revenue growth in 2019. This performance combined with the company's current resiliency indicates it's well-positioned to continue delivering solid performance post-pandemic.
Verizon: 4.40% dividend yield
As a telecom, Verizon Communications (NYSE: VZ) enjoys a consistent, reliable income source from its wireless business. Its dividend yield is attractive, and Verizon has raised its dividend for 13 consecutive years. At an excellent payout ratio of 55%, the company can continue funding the dividend.
While its second-quarter revenue declined 5.1% year over year due to a drop in equipment revenue from pandemic-induced store closures, the company still generated $23.6 billion in cash flow from operations in the first half of this year, a $7.7 billion increase from the previous year. Verizon's free cash flow also increased an impressive 74% year over year in the first half.
Verizon is poised to provide income to investors for years to come as it transitions customers to its growing 5G network. It estimates 5G technology will deliver speeds 10 times faster than today's 4G networks. This leads to new revenue opportunities for Verizon, such as device upgrades and internet service offerings, solidifying Verizon's place as an excellent income stock with the potential to deliver big gains for investors.
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