Because of the measures being taken to fight against the spread of the coronavirus pandemic, more than 10 million Americans have applied for their initial unemployment benefits in the past two weeks.
Given this uncertain economic environment, more investors are turning to dividend-paying stocks to help secure a regular income from their investments. But with billions of people around the world staying home to slow or stop the spread of the virus, many companies that would have been considered safe dividend-yielding investments have had to reduce their operations. This has led several of those companies to cut or even suspend their dividend payouts for the time being.
No industry has been fully immune to these coronavirus-induced challenges, but the current situation also involves a significant increase in demand for some technologies and services, such as video communications and cloud computing, which bodes well for the companies that offer these services.
COVID-19 pushed many tech stocks into the bear market territory in March, including those that pay a safe dividend. And since bear markets always eventually recover, income-oriented investors should consider buying these three dividend-paying tech stocks in April as they are priced much cheaper than a few weeks ago but still have the potential to fully recover from this downturn.
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1. AT&T: 7.4% dividend yield
In addition to its declining legacy cable businesses, AT&T (NYSE: T) is facing extra difficulties because of the coronavirus pandemic. The telecommunications giant has closed more than 40% of its stores and is keeping open the minimum number of locations required to serve first responders, healthcare workers, government users, and customers. Its WarnerBros movie studio is taking a hit from the shutdown of movie theaters around the world.
Yet telecommunications remain an essential need, and customers are very unlikely to cancel their mobile and internet subscriptions even if a recession materializes. And beyond these short-term uncertainties, AT&T is poised to profit from the increasing use of telecommunications, boosted by the deployment of 5G service in the U.S. over the next several years.
AT&T does have a long-term debt burden that it has been working to pay down. Its net debt — total debt minus cash and equivalents — reached $151 billion at the end of 2019 following its acquisition of Time Warner. But the company has had a plan in place to pay that debt down. The company’s free cash flow after the payment of the dividend should help to reduce that significant debt load. Last year, free cash flow reached $29 billion. And management expects free cash flow to increase to a range of $30 billion to $32 billion in 2022, partly thanks to the increase in the company’s mobility segment, which includes wireless communications.
The dividend seems safe since the forecasted free cash flow far exceeds the $14.9 billion payout. Also, given the uncertainties related to the coronavirus outbreak, the company abandoned its $4 billion share buyback program last month to protect its dividend.
Thus, unless the coronavirus pandemic leads to a significant drop in free cash flow over a prolonged period, AT&T’s dividend yield of 7.4% represents an attractive opportunity for income-oriented investors.
2. Cisco Systems: 3.7% dividend yield
Cisco Systems (NASDAQ: CSCO) dominates the networking industry with its $51.6 billion of sales over the last 12 months. Given its worldwide presence, the company is exposed to a potential recession, but the stay-at-home policies also boost the demand for some of its products.
As an illustration, Netflix lowered the quality of its video streaming services in some regions to alleviate the burden on some local service providers that will need Cisco’s products to ramp up the capacity of their networks. Also, Cisco reported a surge in the utilization of its communication and collaboration tools Webex and Jabber.
In addition, the tech giant remains poised to profit from long-term growth opportunities with the muli-year deployment of technologies such as 5G and 400G (high-speed networks).
The $6.1 billion annual dividend represents only 55.1% and 40.9% of the company’s fiscal 2019 earnings and free cash flow, respectively. Besides, with its cash, cash equivalents, and investments that exceeded its total debt by $11.1 billion at the end of last quarter, Cisco can face a prolonged recession without threatening its 3.7%-yield dividend.
3. IBM: 6.1% dividend yield
With its presence in 175 countries, International Business Machines (NYSE: IBM) also depends on the global economy. But the tech giant has been increasing its exposure to the growth of cloud computing, boosted by its acquisition of Red Hat in 2019. During the last quarter, IBM’s cloud business represented 31.2% of total revenue, up from 4% in 2013.
The company is in the same situation as AT&T. It’s aiming at reducing its high net debt of $53.9 billion (which increased because of the acquisition of Red Hat) with its strong free cash flow that amounted to $11.9 billion last year.
Before the coronavirus outbreak, management had expected free cash flow to increase to $12.5 billion in 2020. The impact of the pandemic on the company’s free cash flow remains uncertain, but the dividend of $5.7 billion will still be more than covered by half of that forecasted free cash flow. And given the drop in the stock price over the last few weeks from $158.75 to $107, the dividend yield of 6.1% has become attractive.
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