There’s a balance in the dividend space between high yields and dividend sustainability. In the end, it’s generally more important to find stocks that can keep paying — and hopefully increasing — their dividends than to stretch for high yields that are ephemeral because they are backed by dividends that are likely to get cut. If you want to add a few good dividend names to your portfolio, these three Motley Fool contributors think…
A stellar income opportunity
George Budwell (Gilead Sciences): Gilead Sciences may no longer be the high-growth play that it was earlier this decade, but the biotech has transformed into a top income and value stock in recent years. Shares presently offer a 3.9% yield and trade at a rock-bottom 9.2 times next year’s projected earnings. That’s a rather attractive package for any blue chip biotech.
The best part, though, is that Gilead should be able to continue growing its dividend at a healthy pace for the foreseeable future. Apart from the fact that it reported a monstrous $30.2 billion in cash, cash equivalents, and marketable debt securities at the end of the most recent quarter, its mega-blockbuster HIV drug Biktarvy and the experimental anti-inflammatory medicine filgotinib are both expected to be big winners for the company over the course of the next decade.
Biktarvy, for instance, is forecast to hit a whopping $7 billion in sales as soon as 2024, according to a report by EvaluatePharma. Filgotinib has a shot at producing $6.5 billion in sales early in the next decade, depending on how the anti-inflammatory drug market ultimately shakes out. Taken together, these two high-value drugs should be able to provide the type of free cash flows necessary to maintain and grow Gilead’s dividend for years to come.
Huge barriers to entry protect this dividend
Brian Stoffel (Verizon): I own exactly zero stocks because of their dividend. This makes sense, as income investing doesn’t fit my approach, with over three decades until I hit my golden years. That said, if I were to retire tomorrow, I’d definitely put a chunk of my portfolio into Verizon.
There are a few big reasons for this. First and foremost, the dividend has been a consistent source of income for a long time. The company hasn’t missed a dividend payment since its first one on March 20, 1984 — back when it was known as Bell Atlantic. In addition, it has raised its dividend for 14 consecutive years.
Just as important, even if the company doesn’t raise its dividend, it’s already yielding 4.3%. That’s a hefty payback for an investing world that’s seeing negative interest rates spread across Europe.
It can afford that payout because it collected $17 billion in free cash flow over the past year. Of that, about 59% was used to pay the dividend. That’s a very healthy ratio: It means that Verizon still has room to grow the dividend sustainably if business goes well, and should be able to continue the current payout if business stagnates.
Perhaps most important, however, is Verizon’s competitive position. There are high barriers to entry in telecom. It takes billions of dollars to build out the infrastructure to connect the masses, and it’s a highly regulated industry. With the largest market share of mobile subscribers and it’s status as the first to market with 5G technology, I think Verizon is a great bet for dividend investors…
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