The novel coronavirus (COVID-19) pandemic has forced many companies to scale back their businesses, halt stock buybacks, and suspend dividends to preserve capital. The sudden loss of a dividend can turn a slow-growth stock into dead money, so investors should stick with well-capitalized companies that can maintain their payouts throughout the crisis.
Until this pandemic ends, large-cap tech stocks that pay dividends should fare better than income stocks in the energy, automotive, industrial, and retail sectors. Here are four tech stocks that are still paying safe dividends: IBM (IBM +1.93%), AT&T (T +0.00%), Intel (INTC +4.85%), and Apple (AAPL +0.11%).
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1. IBM
IBM has raised its dividend annually for 24 straight years. If it raises its payout again in 2020, it will become a Dividend Aristocrat -- a member of the S&P 500 that has raised its dividend for at least 25 straight years. IBM currently pays a forward yield of 6.1%, and it spent just 48% of its free cash flow (FCF) on its dividend payments over the past 12 months.
IBM is trying to offset the sluggish growth of its legacy businesses with its higher-growth cloud and analytics services, and it's been an uphill battle. However, its acquisition of Red Hat is already boosting its revenue, and the appointment of cloud and cognitive software chief Arvind Krishna as its new CEO suggests brighter days are still ahead.
2. AT&T
AT&T is a Dividend Aristocrat that has raised its dividend for 35 straight years. Its stock recently fell amid concerns about the coronavirus crisis hurting its WarnerMedia unit, its ongoing loss of pay TV subscribers, and potential delays in the arrival of new 5G devices. AT&T also recently suspended all its buyback plans.
Yet AT&T's forward dividend yield rose to 7.4% after the stock's steep sell-off. It spent just 51% of its FCF on its dividend over the past 12 months, and the suspension of its buybacks (which consumed 7% of its FCF during the same period) gives it plenty of breathing room for future hikes. AT&T's near-term growth should remain anemic, but it boasts a wide moat and plenty of ways to keep growing after the crisis ends.
Image source: Getty Images.
3. Intel
Intel also recently suspended a massive $20 billion buyback plan but left its dividend alone. Over the past 12 months, Intel spent just 33% of its FCF on dividends, but a whopping 80% on buybacks -- so suspending those buybacks will give it more room to continue its five-year streak of dividend hikes. It currently pays a forward yield of 2.5%.
Intel could also spend more of that cash to address its more pressing issues, including competition from a resurgent AMD, its ongoing CPU shortage, and the slowdown in its "tick-tock" model of creating smaller and faster chips. Intel faces tough near-term challenges, but its dividend remains safe, and its orders could accelerate again once the crisis ends.
4. Apple
Apple ended last quarter with $207 billion in cash, cash equivalents, and marketable securities, and generated a FCF of $64 billion over the past 12 months. Apple spent just 22% of its FCF on its dividend over the past 12 months, and it's raised that payout for seven straight years. Its forward yield of 1.3% might seem low, but there's still plenty of room for growth.
Apple's stock was battered by the coronavirus crisis as its supply chains were disrupted, but its long-term tailwinds -- including the expansion of its services ecosystem and rising sales of newer devices like the Apple Watch and AirPods -- remain intact. The growth of those newer businesses should gradually offset slower iPhone shipments and continue generating fresh cash for future dividend hikes.
